Top iron ore firms unlikely to form cartel and cut output - Goldman
By Manolo Serapio Jr
MANILA May 27 (Reuters) - Major iron ore miners from Australia and Brazil are unlikely to create a cartel and agree on output cuts to shore up prices, with weakening demand expected to intensify competition, Goldman Sachs said.
"Efforts to support prices via voluntary production cuts would be counter-productive. In our view, competition in the iron ore market can only intensify; we expect the war of attrition will continue while prices gradually decline towards our $40/tonne forecast by 2017," Goldman analyst Christian Lelong said in a report.
Iron ore fell to a decade-low of $46.70 a tonne in April and even at just above $60 currently, the price is less than half of last year's peak.
Top iron ore producers Vale of Brazil plus Rio Tinto and BHP Billiton of Australia have ramped up output even as demand cooled in top consumer China, sending prices tumbling and leaving smaller, high-cost producers struggling to survive.
An effective cartel implies voluntary production cuts, said Lelong, and "the required coordination among dominant producers with different incentives would be more difficult to achieve among three companies".
"For instance, the offer of $4 billion in financing from Chinese lenders for (its) expansion arguably puts Vale in a position to ramp up growth at a time when Rio Tinto and BHP Billiton are reducing their capital budgets," he said.
Vale secured the credit line from Industrial and Commercial Bank of China Ltd during Chinese Premier Li Keqiang's recent visit to Brazil.
"Cost curves are constantly shifting, market shares are in flux and cartels are difficult to establish and even more difficult to maintain, particularly in commodities with low barriers to entry and weak demand growth," Lelong said. Continuación...