Bloomberg News

Rio Tinto Sees Iron Ore Volatility on China Credit Squeeze (1)

March 11, 2014

Rio Tinto Group (RIO), the world’s second-biggest iron ore shipper, said short-term price fluctuations will continue after a credit squeeze in China and high stockpiles plunged the commodity into a bear market.

“There will be short-term volatility, proof of which you are seeing this week,” Andrew Harding, who heads up the London-based company’s most profitable unit, said today in a speech at a conference in Perth. “We continue to see an attractive longer term demand for iron ore, driven particularly by China.”

Iron ore this week extended its decline, slumping by the most since August 2009, amid concern that demand in China is slowing just as rising output signals a global glut. The Chinese government’s credit squeeze and high stockpiles are driving the rapid change of sentiment, Harding said.

Closely held steel mills in China are “struggling to get funding at the moment,” said Joel Crane, a Melbourne-based commodity analyst with Morgan Stanley Australia Ltd. “So they’ll be refusing both contracted and spot iron ore, and that’s led to the panic selling.”

Iron ore slumped 8.3 percent yesterday to $104.70 a metric ton, the lowest since September 2012. Miners including Rio and BHP Billiton Ltd. (BHP) fell this week on concern earnings may be crimped by cutbacks from the steel mills, their biggest customers. BHP fell 0.6 percent and Rio was little changed today in Sydney trading.

“Sentiment has caused the rapid change as sentiment often does,” Harding said. “We still see good growth in the market through to the 2020s.”

Finance Deals

Premier Li Keqiang’s strategy of driving up interest rates to reduce leverage is exposing a shadow banking underbelly in the world’s second-largest economy as companies struggle to repay loans from trusts, asset managers and commodity-funding businesses. About 40 percent of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates.

BHP and Rio predict lower prices this year after producers in Australia and Brazil spent billions of dollars to expand output. Banks from Citigroup Inc. to UBS AG predict a global surplus. Goldman Sachs Group Inc. listed iron ore among its least-preferred commodities for 2014, last month forecasting that supply gains will push prices down to $80 a ton next year.

“Eighty dollars kinda feels a little low but what the number will be is what it will be,” BHP’s iron ore unit head Jimmy Wilson told reporters in Perth today. “We will see it come down and it will come back up and steady out at whatever point the supply and demand curve dictates.”

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Rebecca Keenan in Perth at rkeenan5@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Keith Gosman, Andrew Hobbs


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