Vale’s Cut Is No Panacea for Iron Ore, Morgan Stanley Says

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Iron ore prices trading near the lowest level since at least 2009 will probably remain under pressure and may even extend declines after Brazil’s Vale SA announced changes to production plans, according to Morgan Stanley.

The world’s biggest producer said on Monday that it would cut about 25 million metric tons of higher-cost supply from this month, while sticking to a full-year output target of 340 million tons. The decisions are a recognition that the market is oversupplied this year and will probably remain in surplus in 2016, according to Executive Director Peter Poppinga.

“This will not lead to higher iron ore prices in the short term -- it could even have the opposite effect,” Morgan Stanley analysts wrote in an e-mailed report. The changes by Vale won’t reduce supply, rather they will add more lower-cost material into the export market, the analysts said.

Benchmark prices are mired in a bear market as Vale and its main Australian competitors -- Rio Tinto Group and BHP Billiton Ltd. -- increase low-cost production even as demand stagnates in China, spurring a glut. Prices have tumbled to a so-called new-normal level, which may persist through to 2020, according to Rio Tinto, which has defended its expansion strategy. Iron ore imports by China shrank in the first six months of the year, underscoring weakening demand growth, data showed on Monday.

“It’s good news for the market,” Caue Araujo, iron ore industry director at the research company AME Group, said by phone from Perth. “We still need some good news on the steel side to have momentum for a price recovery in iron ore.”

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Iron ore with 62 percent content delivered to Qingdao fell 0.5 percent to $50.06 a dry ton on Tuesday, the first drop in four days, according to data from Metal Bulletin Ltd. Prices reached $44.59 on Wednesday, the lowest in data going back to May 2009. It’s 30 percent lower this year after slumping 47 percent in 2014 as production increased.

“The curtailment announcement has an immediate impact on market sentiment, but to have a prolonged influence on physical markets and prices, it must actually result in lower supply,” Citigroup Inc. said in a report on Tuesday, noting that Vale left its full-year supply target unchanged. It’s unlikely that BHP and Rio will follow Vale’s move, it said.

Vale’s stock rallied 6.6 percent in Brazil on Monday after Poppinga’s remarks at an industry conference, while Fortescue Metals Group Ltd. jumped 3.8 percent to close at A$1.79 in Sydney. Rio lost 0.3 percent in London and BHP fell 1.1 percent.

The move to curb output from lower-quality mines is aimed at raising margins, according to Vale’s Poppinga, who said the producer will seek to cut the cost of mining and delivering ore to China to $35 a ton by 2018 from $40 a ton at year-end.

Vale’s break-even price, excluding interest costs, is currently $41 a dry ton, compared with $30 a ton for both BHP and Rio Tinto, UBS Group AG said in a July 10 note.

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