Can Iron Ore Miners’ Supply Discipline Lead to a Price Upside?

Rio and Vale go easy on production guidance

Rio Tinto (RIO) released its operational update for 1H17 on July 18, 2017. Rio’s iron ore shipments fell 6% year-over-year (or YoY) to 77.7 million tons in 2Q17. Rio also said that its iron ore production is now expected to hit 330 million tons in 2017, down from its April forecast of 330 million–340 million tons.

The miner downgraded its guidance due to poor weather and its rail maintenance program. It also cut its guidance for coal production in 2017 due to the impact of the March cyclone.

Can Iron Ore Miners’ Supply Discipline Lead to a Price Upside?

Vale (VALE) posted its quarterly production results on June 20, 2017. Its iron ore production for 2Q17 was strong at 91.8 million tons. This level of production reflected a rise of 5.8% year-over-year (or YoY). Despite this strong growth, the company said that its iron ore production would be at the lower end of 360 million–380 million tons in 2017, in keeping with its value over volume strategy.

The company is serious about maximizing its margins while not chasing market share. The company mentioned that the output of some high silica products would be reduced by an annualized 19 million tons in 2H17.

BHP’s production performance

BHP Billiton (BHP) also released its production results for the quarter and its fiscal year, which ended on June 30, 2017. The company achieved a 4% YoY production rise in iron ore to 231 million tons in fiscal 2017. BHP achieved record production at its Western Australian operations due to productivity improvements and additional capacity at Jimblebar. It expects to achieve further 3%–5% growth in iron ore production in fiscal 2018.

Supply discipline returning to iron ore miners?

These miners’ supply disciplines will be slightly helpful to the escalating supply situation. Investors should, however, note that growth projects such as Vale’s S11D and Roy Hill in Australia are still ramping up and will add to the already well-supplied market.

Cliffs Natural Resources (CLF) will post its quarterly results on July 27, 2017. This miner has very minimal direct exposure to the seaborne iron ore market through its Asia-Pacific segment. Most of its revenue and earnings are tied to its legacy contracts with the US steelmakers (SLX).