Zacks Industry Outlook Highlights: Vale, BHP Billiton and Rio Tinto

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Aug 29, 2014, 09:30 ET

CHICAGO, Aug. 29, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Industrial Metals, including Vale S.A. (NYSE:VALE-Free Report), BHP Billiton Limited (NYSE:BHP-Free Report) and Rio Tinto plc (NYSE:RIO-Free Report).

Industry: Industrial Metals

Link: http://www.zacks.com/commentary/34174/

Iron ore prices had a bullish run in 2013, in contrast to other base metals, thanks to heightened demand from steel end-consumers, particularly in the Chinese construction sector. However, the scenario changed dramatically in 2014. In March, the industry was dealt a severe blow, with iron ore prices suffering the sharpest one-day drop since the 2008-2009 financial crisis, tumbling 8.3% to close at around $105 per ton. This represented an 18-month low for iron ore prices.

Since the first quarter, iron ore prices had somewhat recovered but again plunged to $89 per ton in June -- the weakest performance since September 2012. In August, prices again slid below the $90 per ton threshold.

So far this year, the commodity has lost 33% of its value. Overall, prices have been impacted by myriad reasons such as excessive inventory along with abundant supply of iron as mining companies increased their output, as well as tight credit and slow economic growth in China. Global steel production, as per the World Steel Association, rose by a meager 2.4% in the first seven months of 2014, mainly dragged down by a slowdown in China's output that affected demand for iron ore, its main ingredient.

The lowering price trend has resulted in the closure of high cost iron ore miners and the reduction of exports from non-traditional suppliers such as Indonesia, Mexico and Vietnam. Falling iron ore prices have impacted the second-quarter results. Mining giant Vale S.A. (NYSE:VALE-Free Report) reported a 15% plunge in its second-quarter profit due to the fall in prices of iron ore, its main product. However, its peers BHP Billiton Limited (NYSE:BHP-Free Report) and Rio Tinto plc (NYSE:RIO-Free Report) reported an increase in earnings mostly attributable to their cost reduction efforts which helped mitigate the effect of lower iron prices.

Threat of Oversupply Looms for the Iron Industry

There is a threat of oversupply in 2014 as major iron ore producers, Rio Tinto, BHP Billiton, Vale and Fortescue Metals Group Limited have ramped up production. They intend to continue exploring for iron ore in Australia despite lower growth forecasts for China and weaker iron ore prices, betting on continued strength in iron ore demand over the long term. Thus, Australia, the world's top exporter of iron ore, will rev up its shipments.

Brazil, the second largest explorer, will follow suit. Vale, which alone contributes almost 85% of Brazil's iron ore, is expected to increase its iron shipments by 22% in the second half of fiscal 2014 compared with the first half. In case this excess supply is not matched by adequate demand, it will expose the market to a risk of further decline in prices.

Per the World Steel Association, global apparent steel use is expected to increase 3.1% in 2014, following the 3.6% growth in 2013. In China, apparent steel use had soared 6.1% in 2013 on support from government infrastructure investment. However, this year the government's efforts to rebalance the economy will lead to 3% growth in apparent steel usage in 2014.

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