Moody’s lowers iron-ore and met coal price forecasts, markets to remain under pressure to 2016
Moody’s Investors Service expected iron-ore and metallurgical (met) coal prices to remain under pressure through at least 2016, prompting it to lower its price expectations for both. The firm fingered slower steel output growth in China and rampant oversupply, particularly in iron-ore, for holding prices down for these critical steelmaking ingredients. Moody’s said Wednesday it had lowered its price sensitivities for iron-ore to a range of $40 to $50 per metric ton, while met coal ranged between $100/t to $110/t. In its report, ‘Iron-ore, met coal drowning in oversupply’, the credit rating firm noted that the supply side was slow to respond to the falling prices. Production cuts announced by met coal producers in the US, including Arch Coal and Alpha Natural Resources were taking longer than expected to be implemented. Iron-ore producers were also shuttering operations or filing for receivership, however, the amounts they represented paled in comparison to expected new supply. On the increasing supply/demand imbalance, spot iron-ore prices (62% iron China) dropped about 46% from the average prices in January last year to the December average. The price decline had accelerated this year, with average monthly prices dropping about 31% more to date and currently trading around $50/t, having moved up from the mid-$40s range of recent weeks. Benchmark prices for high-quality met coal for the second quarter of 2015 settled at $110/t, roughly $10 below the settlements from the past four quarters, Moody’s said. “Despite the downward trend of the global cost curve, we believe a significant portion of global met coal production remains uneconomic and further production cuts will be necessary to bring the markets back into balance,” the report found. Meanwhile, slower global economic growth expectations would continue to limit steel demand. Key economies such as Brazil and China were expecting lower growth levels, while Europe was showing some momentum. The US remained in a growth mode, but with slowing indicators, as evidenced by the moderation in recent months in the purchasing managers index (PMI). LOWER COSTS NOT A PANACEA Moody’s warned that lower costs resulting from low oil prices and depreciation against the dollar of currencies in key producing countries, such as Australia and Brazil, would result in slower rationalisation on the supply side and move US producers and those with dollar-linked currencies up the cost curve. At the lower prices, earnings woold be materially impacted, including at the major seaborne producers, such as BHP Billiton, Rio Tinto and Vale. Changes in price assumptions alone would not result in immediate rating actions, but the potential will increase. “Given the subdued global economic growth rates and expectations for only minimal advance in 2015, over capacity in the global steel industry relative to demand, and relentless increasing supply in the iron-ore markets, the outlook for iron-ore prices remains negative. With respect to met coal, slowly realised capacity curtailments and a reduced pace of new production growth should, over the course of 2015, provide a floor to the downward trend in prices and allow for some price recovery towards the end of 2016,” Moody’s said.
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