CEO: Concerned about prices for iron ore, downturn for pricing could last longer than many expect
- notes there is a lot of iron ore supply coming online and profits will be impacted
WSJ Article : Anglo American CEO Worried About Outlook for Iron-Ore Market
Fears That Global Supply Glut Won't Abate Any Time Soon
LONDON— Anglo American AAL.LN +1.67% PLC Chief Executive Officer Mark Cutifani said he's "worried" about the outlook for the iron-ore market amid a sharp fall in prices and signs that a global supply glut won't abate any time soon.
In an interview with The Wall Street Journal, Mr. Cutifani said Anglo would nonetheless press on with its much-delayed Minas-Rio iron-ore project in Brazil, which is expected to deliver its first ore later this year.
"There is a lot of [iron ore] supply coming on and it will impact profits—and so I'm concerned," said Mr. Cutifani.
While Anglo produces a range of commodities, from diamonds to copper, its iron ore and manganese division contributed more than 40% of its underlying earnings in the first half of 2014.
Iron-ore prices have slid 35% this year, to around $87 per ton, according to the Steel Index, as demand growth in key markets such as China has slowed and as major producers such as BHP Billiton BLT.LN +1.26% PLC and Rio Tinto RIO.LN +0.62% PLC have been producing at record output levels.
Mr. Cutifani said that if prices fell to around $80 per ton some producers would find it difficult to stay in the market. But he said it could take time before a full supply side response emerges.
"What I've found in this industry is that a lot of capacity can be really sticky," he said. "My concern is the downside [to prices will be] more and longer than you anticipate."
Mr. Cutifani warned that major producers' strategy of continuing to ramp up supply could backfire.
"In my view, they'll make a call that is right for their investors or they'll pay the price," he said.
Anglo would be unlikely to buy up distressed iron ore producers if prices fall further as the company won't allocate any more capital to the commodity, Mr. Cutifani said. But he said it would be "irresponsible" for Anglo not to proceed with its Minas-Rio project, which he said could deliver iron ore to Asia at a cost of $50-55 per ton. Anglo expects output from Minas-Rio to reach 26.5 million tons a year eventually.
"That rocket has been launched a few years back," Mr. Cutifani said of the project, which Anglo bought in 2008 for $5.5 billion. It is now expected to require total investment of $8.8 billion, against an initial estimate of $2.5 billion.