Production cuts by Vale and Rio will not solve iron ore glut – by Neil Hume (Financial Times – July 17, 2015)

The bruised and battered iron ore industry finally received some good news this week. First, Vale said it would withdraw 25m-30m tonnes of annual production from the market then Rio Tinto cut its total 2015 export forecast by 10m tonnes to 340m tonnes.

While welcome, it would be a mistake to think these announcements mark the beginning of a disciplined response from the industry’s biggest producers to an ongoing supply glut. They don’t.

Take Vale’s “cut”. After its share price jumped more than 6 per cent on the news, the Brazilian miner moved to clarify the remarks made by Peter Poppinga, its executive director of ferrous minerals.

Vale said there was no change to its output guidance for the year of 340m tonnes, or its longer-term target to produce 450m tonnes by 2018. Rather it was cutting production of high cost iron ore — the key ingredient in steelmaking — and replacing it with cleaner, lower cost output from some of its other mines.

For analysts, this was a further demonstration of how the big three suppliers — BHP Billiton, Rio Tinto and Vale — have been able to sustain profit margins while at the same time shovelling more tonnes into a falling market. Vale is also trying to get more of its giant Valemax vessels supplying China in an effort to further reduce costs.

As for Rio’s lowered guidance, again, this was not the result of a voluntary production cut. It was caused by wet weather in the desolate Pilbara region of Western Australia. Cyclones Olwyn and Quang reduced shipments by 7m tonnes in the three months to June, while heavy inland rains hit operations at the mine.

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