The collapse in global iron ore prices continues to have fallout with ratings group Standard & Poor’s yesterday, putting the major iron ore producers on a warning of a possible downgrade, and the state of Western Australia as well.
At the same time Fortescue (FMG) revealed plans to change its work rosters at its Western Australian mines – a move that could lead to the loss of up to 700 jobs from its 4,000 work force, and a significant cost cut.
In fact S&P has put eight of the world’s largest iron ore producers on CreditWatch negative – these include global giants BHP Billiton (BHP), Rio Tinto (RIO), Fortescue Metals and Vale of Brazil.
S&P warned yesterday the eight companies could expect one or even two notch downgrades of their financial and business risk profiles, or they might not get a rating cut at all.
S&P now expects a 2015 price of $US45-a-tonne (down from $US65), a 2016 price of $US50 (down from $US65) and a 2017 price of $US55 (down from $US70).
“In our view, the severe supply and demand imbalance in the iron ore market could continue for the next two years,” S&P said.
“Lower iron ore prices may not only weaken producers’ operating cash flows and financial leverage but may also affect the long-term resilience of some companies’ business risk profiles, given the higher-than-anticipated earnings volatility due to iron-ore-price swings,” the firm said in yesterday’s release.
Some analysts claim the S&P move and the continuing weakness in iron ore prices would also put pressure on BHP and Rio’s dividends.
Both mining giants have committed to not cutting their dividends – in fact they have a policy of progressively increasing their dividends. So they could be forced to increase debt or cut investment spending to ensure they can keep their promise to shareholders.
But that’s what’s happening in the global oil and gas industries as companies large and small slash spending to protect dividends (where they pay them) or reduce dividends as part of a co-ordinated approach to protecting their balance sheets.
S&P said it will announce any possible downgrades in the next two to three weeks.
"During that period, we will assess in more detail the companies’ plans to address the adverse impact on cash flows from falling iron ore prices," the firm said.
S&P said its low price forecasts were based on three factors: “the continued and sizeable expansion of seaborne iron ore supply by major players; the slower pace than expected of displacement of high cost producers; and softer demand growth from China”.
Fortescue’s move to change to its roster to get more work out of fewer of its worker came in a statement released around the same time as the S&P warning was made public.
Fortescue says it’s changing to a two-week on, one-week off roster from a current schedule of eight days on, six days off at its mines in Western Australia’s Pilbara region.
Fortescue said in a statement that the move would bring it into line with standard rosters worked in the industry.
There was no estimate from Fortescue about job losses, but analysts said the changes in work patterns would require fewer employees – perhaps up to 700 fewer.
“While we would prefer not to have to change what has been a successful and differentiating roster for Fortescue, we are taking steps in response to the threat of oversupply in the market over the medium term,” the company’s chief executive Nev Power said in the statement.
Mr Power once again blamed Fortescue’s competitors, including BHP Billiton and Rio Tinto, for causing the global glut of iron ore which has pushed prices below $US50.
He said the oversupply was causing ongoing damage to the industry, all companies in it and to the state and national economies.
"In this environment, bringing our costs down rapidly and sustainably is critical and will place our company in the strongest possible position for the future," he said.
Iron ore prices increased on Monday to $US48.80 a tonne, up 3.2%, but are still hovering around decade lows.
“While Fortescue took a disciplined decision to cut its capital expansion budget last year and defer additional capacity in our system, it is the threat of oversupply in the medium term by our competitors that is causing ongoing damage to our industry, all companies in it and to the state and national economies” Mr Power said.
BHP shares edged down almost 1% at $29.12, Rio shares were off 0.9% at $54.96 and Fortescue shares were up 3.4% at $1.835.
Standard & Poor’s also issued a statement warning that Western Australia risks a downgrade to its ‘AA+’ long-term credit rating due to the state’s weakening budgetary position.
"Slumping iron ore prices will considerably reduce the state’s mining royalties, and without corrective actions by the state, we forecast that its operating position will sustain deficits for the foreseeable future," the ratings group said.
Unless the state government undertakes "significant corrective measures" in its June budget, WA could record average operating deficits of about 1.2 per cent over 2014-to-2018.
"This sustained level of deficits would make the state’s budgetary performance no longer consistent with a ‘AA+’ rating and would further increase its debt burden,” S&P said.
S&P put the state’s long-term credit rating on CreditWatch negative but affirmed the ‘A-1+’ short-term rating.
Iron ore has regained the $US50 a tonne mark overnight Tuesday, continuing the recovery that started late last week.
Iron ore delivered to the port of Qingdao jumped $US1.96 to $US50.78 on Tuesday, rallying for the second day.
In the past week, the commodity hit a 10-year low of $US46.70. The price is up 8.7% in that time.
