Growing oversupply in the iron ore market is damaging for the sector and poses risks, says Moody’s Investors Service.
The ratings agency estimates more than 300 million metric tonnes of new and expanded production will come online over the next few years.
Coupled with this increased supply is muted growth in global steel production until at least 2016.
These two factors will continue to weigh on prices and the operating performance of iron ore producers.
Moody’s has revised price sensitivity for iron ore for the period through 2016 to a range of $75 per metric ton to $85 per metric tonne.
“Downward rating actions for iron ore producers could result as Moody’s reassesses the impact of a protracted pricing weakness,” the agency says in its latest sector comment.
Several key assumptions underline the aggressive supply push by the major iron ore producers:
- The idea of maintaining market position given the number of projects that could be undertaken
- The lower costs associated with higher volumes mitigates the degree of price decline
- High-cost producers will need to exit the market.
Low-cost producers such as BHP Billiton, Rio Tinto and Vale have more tolerance to absorb lower prices in the near term than Cliﬀs Natural Resources, Fortescue Metals and Atlas Iron.
However, Moody’s says the compression of earnings and cash flow is destructive for the sector as a whole.
“We anticipate pricing pressure and low prices to continue over the next several years,” Moody’s says.
The theory that high cost producers, particularly in China, will exit the market and reduce supply may take longer than expected.
Many of the iron mines and steel companies within China are state-owned and captive supply within the steel industry could result in sustained operations despite losses.
Global steel production growth in 2014 remains muted with China, the key driver of iron ore consumption, continuing to slow.
Chinese production growth slowed through August 2014 to about 2.6% is expected to remain at a run rate for the remainder of 2014.