The iron ore collapse has pushed producers to the brink of survival, according to the head of the world’s second-biggest mining company.
“There are a lot of producers that we believed would leave the market that are hanging on by their fingernails,” Sam Walsh, chief executive officer of Rio Tinto Group, said in an interview with Bloomberg Television in London. “They are burning up cash reserves of their shareholders.”
Iron ore’s 45 percent retreat this year has left the industry on the precipice of an unprecedented shake-out as higher-cost suppliers are slowly forced to exit the market. Prices are continuing to fall as the largest companies, including Vale SA, Rio Tinto and BHP Billiton Ltd., expand production and grab market share.
Iron ore fell below $39 a metric ton last week, a record low in daily prices dating back to 2009. That’s down from above $190 in 2011, when Chinese demand was booming.
“I suspect that right now, even at a price of $39 a ton, there are people that are suffering pretty loudly,” Walsh said. “Sooner or later the adjustment will take place.”
The slump has hurt miners’ shares. Rio’s stock has lost 37 percent in London this year. It advanced 2.3 percent to 1,890.5 pence by 10:28 a.m. local time. BHP has fallen 47 percent this year while in Brazil, Vale has dropped 49 percent.
Rio and its rivals have been criticized by analysts, competitors and governments for pursuing a strategy of expanding lower-cost mines even as prices fell amid a global glut. Walsh said it would be abnormal for his company to consider withholding supply given that Rio is the lowest-cost producer.
Rio and BHP are in an “imaginary world” because their strategy hurts themselves as much as their competitors, Lourenco Goncalves, the CEO of Cliffs Natural Resources Inc., the biggest U.S. iron ore producer, said last month. Prices below $50 are “not comfortable to anyone,” he said.
Australian producer BC Iron Ltd. said last week it had decided to suspend production from its Nullagine mine because of the price slump. The mine has capacity of about 6 million tons a year. In contrast, Rio Tinto expects to produce about 340 million tons this year from mines in Australia and Canada. The company holds about a 20 percent market share in the industry.
“The global iron ore industry has slipped into turmoil during the past 18 months, given the steady collapse in the spot iron ore price,” Citigroup Inc. analysts wrote in a report Tuesday. “The market is becoming increasingly concerned about the survival of the higher-cost producers.”
Walsh reiterated his prediction that there are few companies that can withstand iron ore prices at $30. Only four companies are profitable at current prices, Rio, BHP, Vale and Australia’s Fortescue Metals Group Ltd., according to Citigroup.
“The sustainable price of $30, it just won’t physically work,” Walsh said on Monday. “There’s a lot of high-cost producers that just aren’t going to pass muster at that sort of price range. It’s not sustainable. It is fantasy land at that level.”
While his competitors are floundering, Walsh said Rio is “well positioned” for what will be another tough year in 2016 because the company has the lowest debt in the industry. Glencore Plc, which last year proposed merging with Rio, and Anglo American Plc have worked to reduce debt and sell assets in response to weakening prices and growing concern about their balance sheets.
Walsh said he would consider acquiring copper projects but only if they were the highest quality, or so-called tier-one assets. Higher interest rates may spur owners of such assets to put them on the market, he said.
“I expect we need a bit more pain,” Walsh said. “A minor interest adjustment could actually be a tipping point for some people. It could be one of the tipping points in terms of people that are hanging on with relatively high debt. It’s not a problem that we face.”