Iron Ore Stocks Fall On Slowdown Fears
The Age
Friday October 10, 2008
IRON ore stocks have plunged on fears that a slowdown in China's steel industry, brought on by the global economic crisis, means that the days of boom demand and prices for the key steel-making raw material are over.
The trigger for the sell-off in junior and mid-ranked iron ore stocks was a candid statement from Mount Gibson Iron that several of its customers in China had asked it to delay iron ore shipments in the current quarter.More telling was its assessment that there was a slowdown in demand for iron ore in China due to "current economic uncertainty and the tightening of credit facilities, leading to reductions in steel production and the current significant build-up of iron ore stockpiles at Chinese ports".Mount Gibson is Australia's fourth-biggest iron ore producer, with annual output of about 6 million tonnes from its Tallering Peak and Koolan Island operations in Western Australia.The company said it had no obligation to agree to any of the requests to delay shipments. "In this regard, each customer has entered into binding long-term ore sales agreements and is contractually obligated to take delivery of the shipments allocated to it in the second (December) quarter," Mount Gibson said.But it said it would "endeavour to reach an acceptable accommodation" of the customers' requests in shipping schedules. Mount Gibson shares plunged 28, or 24%, to 87.5. Atlas Iron fell 16, or 12.6%, to $1.10. It has just received the OK to start production at an initial annual rate of 1 million tonnes.Junior iron ore group Brockman fell to below cash backing with a 10, or 15%, fall to 57 while advanced hematite-magnetite producer Gindalbie shed 4, or 8%, to 45.5. All the falls came on top of heavy losses by the sector in recent weeks.China has as many as 270 steel mills. It has grown in recent years to become the world's biggest producer, accounting for 39% of the total global production of steel of about 1.5 billion tonnes. The rapid growth is tied to China's boom and its status as the world's "factory".But many of the Chinese steel mills are small enough to be called "Ma and Pa" operations. It is at those levels that the recent retreat in steel prices will be hurting. Australia's biggest producers - Rio Tinto, BHP Billiton and Fortescue - sell to the big steel mills.So far, the big three of Western Australia's Pilbara are not admitting to any impact of the global economic crisis on their iron ore order books. Australia's biggest iron ore producer, Rio Tinto, said it was continuing to ship ore as normal while the No.2 producer, and Rio's hostile suitor, BHP Billiton, said that there was "no push-back in iron ore deliveries".Andrew Forrest's Fortescue said that it had "not experienced any difficulties in its sales program". Its customer base of some 30 steel mills had continued to meet their contractual commitments, Fortescue said.Because of its focus on iron sales to China, Fortescue took a 32, or 8.8%, share price hit to close at $3.30. It is down by 74% on its June 24 peak of $12.78. BHP fell 6 to $29.84 while Rio fell $3.11, or 3.8%, to $78.01.Rio is trading at a record discount to BHP's proposed 3.4-for-1 scrip offer. At yesterday's price, Rio was trading at a ratio of 2.61 times. Its greater share price fall yesterday was attributed to continued weakness in aluminium prices. Rio bet $US38 billion last year that aluminium prices would take off with its acquisition of Alcan.UBS said in a note to clients that in recent weeks it had "become apparent that the emerging markets are not immune to tight credit" and that it had seen "evidence of suddenly slower demand in the BRIC (Brazil, Russia, China and India) countries".The reporter owns BHP shares.
© 2008 The Age