Standard & Poor’s will decide over the next two to three weeks whether or not to downgrade the ratings of some of Australia’s iron ore producers including BHP, Rio Tinto and Fortescue Metals.
The agency today reforecast down its expected iron ore price for 2015 to $US45 a tonne from $US65. A year ago, iron ore was fetching $US118 a tonne.
Eight companies have been placed on a negative credit watch. In reviewing each over the next few weeks, Standard & Poor’s will focus on liquidity, current costs and the ability of each iron ore producer to reduce costs further.
Standard & Poor’s says the sharp fall in iron prices reflects a severe supply and demand imbalance in the market.
It believes low prices could persist for the next two years because of:
- The continued and sizable expansion of iron ore supply by major players.
- The slower than expected pace of displacement of high cost producers.
- Softer demand growth from China.
Here’s how Standard & Poor’s sees iron ore prices:
The ratings agency says a combination of lower energy costs and weaker currencies, including the Australian dollar, is sustaining marginal producers and prolonging the supply glut and a weakness in iron ore prices.
“In our view, lower iron ore prices may not only weaken producers’ operating cash flows and financial leverage, but may also affect the long-term resilience of some companies’ business risk profiles, given the higher-than-anticipated earnings volatility due to iron-ore-price swings,” says Standard & Poor’s.
The ratings agency expects steel production growth in China to be weaker than GDP forecasts (6.8% for 2015) because of a soft property sector.
The iron ore producers under credit watch: