Photographer: Simon Dawson/Bloomberg

Biggest U.S. Iron Ore Producer Says Rio, BHP in 'Imaginary World'

  • Biggest Australia miners won't change behavior, Goncalves says
  • `Prices below $50 are not comfortable to anyone,' CEO says

The biggest iron ore producer in the U.S. says its larger rivals in Australia are hurting themselves as well as their competitors as they ramp-up production in an oversupplied market.

With iron ore slumping to less than $50 a metric ton, revenues at the biggest miners are shrinking faster than costs, according to the head of Cliffs Natural Resources Inc., who said the majors’ expectations that rivals will quit the market aren’t being fully realized.

“Prices below $50 are not comfortable to anyone, including the majors,” Chief Executive Officer Lourenco Goncalves said in a phone interview from the company’s headquarters in Cleveland, Ohio on Tuesday. “The cost-cutting is not even close to offset their loss in revenues. My entire point: the loss in revenue, totally avoidable. Self-imposed. Self-inflicted.”

BHP Billiton Ltd. spokeswoman Emily Perry said on Wednesday the company wouldn’t respond to Goncalves’s remarks, while Rio Tinto Group sent comments from Brendan Pearson, head of the Minerals Council of Australia, which represents miners. There is open competition in the iron ore market and the Cliffs’ CEO shouldn’t be taken seriously, Pearson said.

Raising Output

Iron ore sank below $50 last week on expanded low-cost production from Rio, BHP Billiton and Brazil’s Vale SA, coupled with signs demand in China is contracting. The biggest producers are raising output as prices sag, betting that they can pare costs per ton and boost market share while less efficient miners face closure. Iron ore will decline gradually for years to come, Alan Chirgwin, BHP’s vice president of marketing for iron ore, has forecast.

Goncalves took the helm at Cliffs in 2014 after an activist-investor revolt, promising to end the company’s vulnerability to the oversupplied seaborne market. Shares in Cliffs have fallen 73 percent in the past 12 months as iron and steel prices have tumbled. Last year, Cliffs produced about 34 million metric tons of iron ore from mines in the U.S. and Asia-Pacific. Rio produced 295.4 million tons in 2014, filings show.

“In their imaginary world, 60 million tons of capacity will go offline this year, then another 125 million tons of capacity will go out of commission next year,” Goncalves said. “That’s not the case. Everyone is driving down costs, everyone is trying to continue to cope. You’re not seeing any meaningful number of tons going offline.”

Prices Slump

Ore with 62 percent content delivered to Qingdao fell 0.8 percent to $49.11 a dry ton on Tuesday, the lowest since July 9, data compiled by Metal Bulletin Ltd. show. The raw material has lost 31 percent this year, having bottomed at $44.59 on July 8, a record in daily price data dating back to May 2009. Citigroup Inc. is among banks seeing further losses. Prices rose 0.1 percent on Wednesday to $49.18 a ton.

BHP and Rio have defended their approach. In May, Chirgwin said the strategy was rational, with the company’s performance dependent on being the most efficient producer, not on restraining supply. Rio Chief Executive Officer Sam Walsh has said if it cut output, forfeited supply would be made up by others.

About 120 million tons of high-cost production will exit the market this year, 75 million tons of which will be from outside of China, Rio’s Bold Baatar, managing director of iron ore sales, marketing and marine, told investors in Sydney on Sept. 3.

Harding’s View

In August, Rio reported that while underlying first-half earnings from iron ore before interest, taxes, depreciation and amortization fell 49 percent to $4.09 billion, its average margin was 54 percent. Rio’s iron ore unit “is one of the most attractive businesses in the world,” Andrew Harding, the division’s chief executive, told investors on Sept. 3.

There’s “just genuine and open competition” in the iron ore market, said Pearson, chief executive officer at the Minerals Council of Australia. “If this makes Mr. Goncalves uncomfortable, he is free to exit the sector.”

Australia’s government in May ruled out an inquiry proposed by Fortescue Metals Group Ltd. Chairman Andrew Forrest into iron ore’s collapse. In August, Forrest said prices had plunged as the biggest miners committed “market vandalism” by overproducing. The comments from Australia’s number-three shipper were rejected by Rio. 

Prices will drop gradually until they find a level well below $50, BHP’s Chirgwin told the Australian Financial Review in remarks verified by the company on Tuesday. The new level will be at the highest break-even of a major producer in Australia or Brazil, he said.

“BHP is basically saying that prices will readily fall over the next few years before finding a new normal at the highest break-even,” said Goncalves, who doesn’t expect the majors to shift strategy or a recovery in iron ore. “Unless they change their behavior, I don’t see prices going dramatically up.”

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