Iron Ore Pain Is Settling In For Another Year

Image: Atlas Iron.

The weaker iron ore price will heighten pressure on Australia’s miners for another year to come, ratings agency Moody’s says.

In a report, Moody’s Investor Services said iron ore’s fall from more than $110 a tonne to about $84 a tonne over 2014 will negatively affect mining and related industries for the next 6 to 12 months.

“Lower prices — combined with the general softness in prices across the whole commodities spectrum — is exercising a flow-on negative effect on several issuers and sectors across the rated portfolio, including mining services, construction, and airlines,” Moody’s vice president and senior analyst Matthew Moore said.

Iron ore is Australia’s largest export by value and with new supply from both Australia and Brazil flooding the market at a time when China’s demand for the commodity is slowing, its price is being driven down further.

“To preserve margins, we expect the miners to reduce their scope of work and renegotiate contracts with the providers of mining services, which will in turn further reduce earnings and cash flows at the latter,” Moore said.

This chart shows where all the additional supply is coming from.

Recently there have been some big shorts against Australia’s pure iron ore players as traders await further drops in the commodity price. More on that here.

Atlas Iron’s credit profile will be the most affected because of its exposure as a single commodity producer with significant cash costs, Moody’s said.

“Atlas will be further impacted by widening price discounts for its iron ore, which is generally of lower quality than that from the major producers,” the ratings agency said.

Fortescue is in the same boat as a single-commodity producer but has lower tonnage costs than Atlas.

Diversified majors BHP Billiton and Rio Tinto are less exposed to the price drop. Both companies are spread across numerous commodities and have lower cost profiles but Moody’s said that doesn’t make them immune to the pressure, just “better positioned”, especially with improvements in debt levels.

The majors have been reducing labour forces, including cutting the number of fly-in-fly-out workers which has impacted the aviation sector – including Qantas and Perth Airport – over the past 18 months in the face of a weaker price environment.

Further capex reductions would also negatively impact the construction and engineering sectors, including companies like Leighton Holdings, which could see the amount of project work fall.

“To preserve margins, we expect that they will reduce their scope of work and renegotiate contracts with mining services producers, which will result in further falls in earnings and cash flows at the latter,” Moody’s said.

“This trend affects companies such as Ausdrill, Barminco and Emeco.”

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