Iron ore price plunge – Mining CEOs didn’t hear obvious message from China

There is an automatic assumption the big, expensive decisions by powerful insiders are always deeply considered. Bemused outsiders often reason that the sheer size of the bet means “they must know what they’re doing.” Reality is often different. A persuasive director can sway a board; a powerful politician an entire party. History is replete with examples. Judging by comments below from the CEO of a global steel producer, we’re living through another of them. He is perplexed at how the world’s three major iron ore producers failed to read signs of a slowdown in China. This oversight resulted in a massive expansion in the supply of a product – iron ore – whose demand is closely tied to China’s economic expansion. In the long-term, in this case 25 years plus, the wrong-footed CEOs of BHP, Vale and Rio may be proven right. But as the great economist John Maynard Keynes wrote almost 100 years ago: “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” Ditto CEOs of mining companies. – Alec Hogg

A worker walks near conveyer belts loaded with iron ore at the Fortescue Solomon iron ore mine located in the Valley of the Kings, around 400 km (248 miles) south of Port Hedland in the Pilbara region of Western Australia December 2, 2013. Shares in Australia's Fortescue Metals Group jumped 9 percent on August 5, 2015, boosted by a report that China's Hebei Iron & Steel Group and Tewoo Group could invest in its infrastructure and mining assets. The iron ore miner's term loan traded higher on Tuesday, also lifted by speculation over a potential tie in.    REUTERS/David Gray
A worker walks near conveyer belts loaded with iron ore at the Fortescue Solomon iron ore mine located in the Valley of the Kings, around 400 km (248 miles) south of Port Hedland in the Pilbara region of Western Australia December 2, 2013. Shares in Australia’s Fortescue Metals Group jumped 9 percent on August 5, 2015, boosted by a report that China’s Hebei Iron & Steel Group and Tewoo Group could invest in its infrastructure and mining assets. The iron ore miner’s term loan traded higher on Tuesday, also lifted by speculation over a potential tie in. REUTERS/David Gray

By Thomas Biesheuvel

(Bloomberg) – The steel industry executive who correctly predicted weakening Chinese demand three years ago is perplexed by the inability of the world’s biggest miners of iron ore to accept the new reality.

Producers of the steelmaking raw material including Rio Tinto Group, Vale SA and BHP Billiton Ltd. are expanding output in anticipation of China raising steel production to as high as 1 billion metric tons in the coming decades.

“I do not have a clue how they drew up these figures or what the background for this optimism is,” said Wolfgang Eder, chief executive officer of Austria’s Voestalpine AG and chairman of the World Steel Association.

Steel demand in China, consumer of half the world’s supplies, is expected to fall this year for the first time since 1995. Output declined 1.3 percent in the first half and will drop to 807 million tons for the full year from 816 million tons in 2014, according to the China Iron & Steel Association.

That’s wrong-footed iron-ore miners who’ve spent billions increasing supply.

Read also: Anglo to slash another13% off its book value after $100bn iron ore folly

The price of iron ore has tumbled 36 percent in the past year. Ore with 62 percent content traded at $56.21 a dry ton on Monday, according to data compiled by Metal Bulletin Ltd. It touched $44.59 on July 8, a record for data going back to May 2009, and two-thirds lower than the level when Eder in 2012 said prices would tumble on weaker Chinese growth and increased supply.

“There is so much iron-ore and coal in the market that it makes sense to do some shopping around,” Eder said Thursday. “This is much easier than in the past.”

He sees further weakness in China, with steel mills closing as the world’s largest producer of the metal remakes its industry.

“The need for a steel industry restructuring in China has surged sharply,” said Eder, who sees 300 million to 400 million tons of unneeded capacity in the nation. “The least one should expect is that no new capacities are coming in China over the next years and the gradual closure of obsolete capacities.”

His views echo those of Lakshmi Mittal, billionaire chief of ArcelorMittal, the biggest steelmaker. Mittal said July 31 that falling steel prices will squeeze Chinese producers, accelerating state plans to close mills.

Among the miners, Rio Tinto sees output reaching 1 billion tons by 2030, Vale expects 900 million tons by 2025 and BHP Billiton as much as 985 million tons by the mid-2020s even after trimming its forecast last month.

Robust Review

Rio, BHP and Vale have expressed confidence in their outlooks for growth. BHP CEO Andrew Mackenzie said Aug. 25 that the company had gone into “incredible detail” in reaching its revised figures, while Rio’s Sam Walsh said Aug. 6 the company’s estimates had been put through a “robust review.” The miners referred to their earlier statements when contacted by Bloomberg on Tuesday.

Eder can’t share their optimism.

“Looking at the most recent developments in China, I do not see at least for the next few years the financing power to do the large construction projects that these enormous volumes of steel will be needed for,” he said. “Maybe in the next 25 to 30 years, but not in the next 10 years.”

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