Supply outlook remains strong
The weak demand from China is hurting iron ore prices. The supply side, on the other hand, remains quite strong. In their latest quarterly reports, iron ore majors reported strong quarterly iron ore production numbers.
BHP Billiton’s (BHP) (BBL) iron ore production for 1H16 was 118 million tons, a growth of 4% year-over-year. BHP management has downgraded its guidance for iron ore due to the Samarco incident. Its new guidance for fiscal 2016 is 237 million tons, which is 4% below the previous guidance. However, the company maintained that further improvements in the efficiency of the integrated supply chain should deliver an increase in system capacity to 290 million tons per year over time.
Rio Tinto’s (RIO) production for 4Q15 was 87.2 million tons, or 10% higher YoY. RIO guided for ~350 million tons (on a 100% basis) of global shipments for 2016 from its operations in Australia and Canada.
Vale’s S11D is ramping up on schedule
Vale’s (VALE) iron ore production (excluding iron ore acquired from third parties and Samarco’s production) was the highest on record at 333.4 million tons for 2015, which is an increase of 4.4% YoY. Its 90 million tons per year S11D project is also ramping up quickly and is slated to come online in the second half of 2016.
The strong iron ore supply outlook coupled with weaker demand has put unprecedented pressure on iron ore prices since mid-2014.
The iShares MSCI Brazil Capped ETF (EWZ) invests in large-cap and mid-cap companies in Brazil. Vale forms 2.8% of EWZ’s ETF holdings. CLF forms 3.7% of the SPDR S&P Metals and Mining ETF (XME) holdings.