Vale ‘s Iron Ore Shifts Focus to Rio Tinto

iron ore china dry bulk
Cranes unload iron ore from a ship at a port in Rizhao, Shandong province February 7, 2015, Image: Reuters

By Jasmine Ng

(Bloomberg) — The global iron ore market will be looking for an update from Rio Tinto Group on its expansion strategy after Vale SA signaled that it may be willing to moderate supply growth amid a glut, according to Morgan Stanley.

The move by Vale, the top supplier, is important as it’s “the first time the company had publicly recognized that a supply-side response was required,” analyst Tom Price wrote in a report on Monday. “Competitive supply growth in this market appears to be ending. This creates upside risk for prices.”

Iron ore sank to a 10-year low at the start of April before going on to cap the biggest monthly gain in almost two years as BHP Billiton Ltd. said it was deferring port works, restraining the pace of its expansion. Vale is considering cutting output from its most expensive mines, Peter Poppinga, executive director for ferrous and strategy, said on Thursday. Rio will hold its annual general meeting in Perth, Australia, this week.

“Iron ore’s biggest miners can influence prices with a significant change in production rates,” Price wrote, estimating that Vale, Rio, BHP and Australia’s Fortescue Metals Group Ltd. account for 75 percent of supply. “The market will probably seek clarity on Rio Tinto’s growth strategy.”

Ore with 62 percent content at Qingdao rose 2.4 percent to $57.55 a dry metric ton on Monday, according to data on the website from Metal Bulletin Ltd. In April, prices climbed 9.4 percent, the biggest increase since July 2013. They are 70 percent below a 2011 record.

‘We Are Ready’

Vale is prepared to cut as much as 30 million tons from higher-cost mines, Poppinga said on a conference call, while reaffirming long-term plans to grow production capacity by 29 percent to 450 million tons. “If the market demands it, we are ready to reduce some production flows,” Poppinga said.

Seaborne supply will exceed demand by 55 million tons this year, rising to 184 million tons in 2018, according to Morgan Stanley estimates. That’ll keep the price outlook to a range of $55 to $65 over the medium term, the bank said.

Rio kept a target to ship 350 million tons of ore this year as an expansion of mines, railroads and port facilities in Australia’s Pilbara region is almost complete, the London-based company said April 21.

The outlook on BHP’s credit rating was reduced to negative by Standard & Poor’s on Monday, while the agency opted to maintain the stable outlook on Rio. Last week, S&P cut Vale’s rating, citing weak market conditions.

“Iron ore is staging a short-covering bounce in a bear market,” INTL FCStone Inc. said in a report received on Monday, referring to gains spurred by some investors ending bets on losses. The commodity “will eventually retest its recent lows, particularly if the majors do not take steps to cut output.”

(c) 2015 Bloomberg.