Bidness Etc takes a look at the announcement by Vale SA to cut down production in order to stabilize prices
Iron ore futures in the Chinese market have witnessed a rise in prices of about 4% on Monday on the back of announcement by Vale SA (ADR) (NYSE:VALE) that it might cut down on production in order to stabilize prices.
The top miner has faced a consecutive third quarterly loss in the wake of dwindling iron ore prices. According to Morgan Stanley (NYSE:MS) analyst Tom Price, the move by Vale is important to consider as it’s the first time a producer has realized that a supply side action needs to be taken in order to stabilize the prices, which are at record lows due to a supply glut.
In April, it was revealed in a data regarding the Chinese manufacturing sector that the Chinese industries have suffered a massive reduction in activity during the last one year. Following the news, it became eminent that the world’s biggest iron ore consumer country will not need the commodity in the same quantity, which created a supply glut in the market and a decision had to be taken in order to reduce the production.
The Brazilian iron ore miner Vale SA hinted last week that it could reduce volumes by as much as 30 million tons over the next couple of years in a bet to improve margins. Peter Poppinga, executive director for ferrous and strategy at Vale said the output will be cut from the most expensive mines.
Meanwhile, BHP Billiton Limited (ADR) (NYSE:BHP) has also recently announced that it would halt its Australian project, which would’ve increased BHP’s production volumes by 20 million tons. Following these curtailment announcements from two of the substantial market players, all eyes right now remain on Rio Tinto Plc’s (ADR) (NYSE:RIO) expansion plans update, which is likely to be revealed in the annual general meeting to take place this week in Perth, Australia.
Price said that the competitive supply growth seems to be dying out as producers are shifting their focus. He added that this move by the players may have upside risk on prices. As per Bloomberg, Price believes that 75% of the iron ore supply comes from Vale, BHP, Rio and the Australian Fortescue Metal Grp (OTCMKTS:FSUMF) and that the production rate changes by any of them can have significant impacts on prices.
Nevertheless, Poppinga in his conference call asserted that Vale sticks to its long-term plans for growing production to 450 million tons, increasing by 29% from the current levels. However, the current market demands lesser than that and the company is ready to respond to the call for reduction of production flows.
According to Morgan Stanley’s report, the seaborne supply is estimated to be over 55 million tons this year and increasing to 184 million tons by 2018. With these volumes, the bank has expected prices to hover in the $55-65 range in medium term.
INTL Fcstone Inc (NASDAQ:INTL) report says that if the major players do not take any step to curtail production, the prices may witness even further lows. Standard & Poor’s (S&P) has revised BHP Billiton’s credit rating to negative, while maintaining stable outlook for Rio. It also cut down Vale’s credit rating last week on the basis of weak market conditions.