There is a growing rift between the major mining companies and investor forecasts for the future of iron ore prices. Investors are worried that a faltering economic recovery a slowing Chinese economy coupled with increasing supply of iron ore will cause a drop in price. While mining companies, the likes of BHP Billiton, Rio Tinto and Vale SA are still confident that demand will remain high supporting prices through 2015.
Most analysts point to flattening demand from China, the world largest producer and consumer of steel as a major factor. Iron ore makes up the bulk of revenue for these major mining firms. However, the lack of investor confidence concerning the Chinese and global economy is affecting steel demand and the share prices for iron ore mining firms are on a downward trajectory.
1. Iron Ore Supply Increases
The increased supply of iron ore will come from Brazil and Australia. For instance, BHP’s Pilabra projects in Western Australia are set to increase production dramatically over the next decade.
Mr Ian Ashby President of BHP’s iron ore division stated his company is setting a long term production target of 450 million tonnes of iron ore a year to full exploit the potential of his division assets. He added that BHP is well positioned for a drop in prices as the company’s production costs remain below USD 40 per tonne.
Rio Tinto has targeted increasing production in the region to 433 million tonnes from an existing capacity of 225 million tonnes per year.
2. Price Outlook
The increase in supply, estimated to increase 53 percent by 2015 has prompted analysts to take a bearish outlook for iron ore prices, and consequentially the earnings potential for the mining firms.
According to the median estimates of 10 analysts surveyed by Bloomberg News “Global prices may fall 29% to an average USD 123 a metric ton in 2015 from a record USD 173 this year. The survey also stated that reduced ore prices will cut the income of BHP and Vale as much as 50 percent by mid-decade.”
However, the dramatic increases in supply have not changed the optimistic outlook of the mining companies.
Mr Sam Walsh head of Rio Tinto iron ore division recently commented on the demand for iron ore “They are still very good price and we are shipping flat out.”
He added that he has had to smile at recent reports pointing to falling iron ore prices. Walsh also cited that the bulk of the new capacity will not come online until 2015, supporting prices over the next four years.
(sourced from ResourceInvestingNews)