Wall Street Journal: Iron Ore Miners Must Forge Ahead Carefully
Forecasting iron ore prices is an art, not a science. The price hit about $160 in February, and though it's since fallen back to about $130, iron-ore producers are holding steady. Nev Power, chief executive officer of Fortescue Metals, says prices are sustainable at between $120 and $130 a ton. Vale CEO Murilo Ferreira says the price could reach as high as $145 this year.
Others see the price sliding further. Capital Economics has iron ore at $110 by the end of this year and $90 by the end of 2014. By 2015, the spot price could be as low as $80 a ton, according to Goldman Sachs.
The demand side of the equation is pretty clear. China's economic growth is recovering. Its iron-ore imports are expected to grow an average 5% a year through 2018, according to Australian government forecasts.
The problem is with supply. Rio Tinto and BHP Billiton alone expect to lift capacity by almost 140 million tons a year by the end of 2014. Australia's government forecaster says the country's iron-ore exports will rise by 70%, or 343 million tons, to 831 million tons by 2018.
At the same time, Chinese steel producers are pushing back against higher ore prices. UBS analyst Glynn Lawcock says about half of China's steel industry could be unprofitable at current prices.
Lower prices reduce profits for everyone, including major producers like Rio. But it's an even bigger worry for Fortescue, whose cost of production is considerably higher than larger peers who dig up the ore at less than $40 a ton. Bank of America Merrill Lynch estimates that with prices around $130 a ton, Fortescue will earn $1.55 a share in its 2014 fiscal year, but that slides to a $0.02 loss if iron ore slumps to $70.
Fortescue's planning to ramp up production capacity by about 50% this year. The company says additional scale will bring its average cost of production below $50 a ton—closer to the likes of Rio. Most forecasters see iron ore prices on a downward slope.