Steep Drop in Iron Ore Prices Threatens Miners’ Cash Flows

Alphonzo Desade |

Steep Drop in Iron Ore Prices Threatens Miners’ Cash FlowsIron ore, a key steelmaking ingredient, was one of the few commodities to post gains in 2013. However, so far this year, the bulk commodity has struggled amid concerns over a slowdown in China, which consumes two thirds of global seaborne iron ore. The slowdown in China has come at a time when major mining companies such as Australia’s BHP Billiton (BHP) and Rio Tinto (RIO), and Brazil’s Vale (VALE), have been ramping up their production.

Earlier this week, iron ore prices fell to a fresh low, dropping below $100 a ton for the first time since September 2012. Prices for benchmark 62 percent iron ore dropped to $98.50 a ton on Monday. Iron ore prices have already fallen more than 11 percent in the past one month alone. For the year, the commodity is down more than 20 percent. Given the steep drop in prices, analysts are already slashing their outlook for average iron ore prices. Recently, Macquarie lowered its average price forecast for iron ore for the third quarter to $100 a ton from $110 a ton.

The key question is what would be the impact of lower iron ore prices on major miners’ bottom-line. The likes of Vale, BHP Billiton and Rio have among the lowest costs in the world. Therefore, they are expected to remain profitable even if iron ore prices drop to around $80 a ton, which many analysts say is a possibility as more supplies hit the market in the next few years. However, lower prices would significantly hurt miners’ cash flows from operations. That is a major concern as the likes of BHP and Rio are looking to reduce their net debt and boost shareholder distributions.

 

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Companies

Symbol Name Price Change % Volume
RIO Rio Tinto Plc 39.07 -0.42 -1.06 2,130,059
VALE VALE S.A. American Depositary Shares Each Represen 8.78 0.12 1.33 31,286,542
BHP BHP Billiton Limited 38.19 -0.55 -1.42 2,743,523
SBHGF Sbi Holdings Inc Ord 11.92 0.00 0.00 0

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