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iron ore news - by jasmine ng

Iron ore declined below $90 a metric ton for the first time since 2012 on signs of slowing demand in China, the world’s biggest user, amid expanding supplies.

Ore with 62 percent iron content delivered to the port of Tianjin dropped 2.1 percent to $89 a dry ton today, the first time the price fell below $90 since Sept. 7, 2012, according to data from The Steel Index Ltd. The raw material lost 3.8 percent last week and retreated in eight of the past nine weeks.

Iron ore slumped 34 percent this year as mining companies including Vale SA (VALE5) and BHP Billiton Ltd. expanded output, betting on sustained growth in demand from China even as economic expansion slowed. Stockpiles at Chinese ports are near record levels, while domestic production is forecast to climb to an all-time high this year as bigger mines open, according to Mysteel.com, the country’s largest industry consultancy.

“Port inventories are still relatively high, so there’s more downside to iron ore prices,” saidHelen Lau, a Hong Kong-based analyst at UOB Kay Hian Ltd., predicting a floor of $80 in the second half. “During the summer season, you can expect the continuous slowing down of steel production. Steel mills have no interest in replenishing their stocks.”

Inventories at ports rose 0.1 percent to 106.56 million tons last week, near a record 106.86 million tons reached in the week to May 30, according to Beijing Antaike Information Development Co. Reserves expanded 31 percent this year.

Output of low-grade, unprocessed iron ore may rise 5.6 percent to 1.52 billion tons this year from 1.44 billion tons a year earlier, Shi Zhenglei, a Shanghai-based analyst with Mysteel.com, said by phone today. That’s about 400 million tons of seaborne equivalent.

China’s raw ore has an average iron content of 26 percent, compared with the global benchmark of 62 percent iron, he said.

Futures for July settlement slid 0.8 percent to $89.05 a ton on the Singapore Exchange by 5:31 p.m. local time, extending a drop to the lowest level since the contract started in April last year.

To contact the reporter on this story: Jasmine Ng in Singapore at jng299@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.netThomas Kutty Abraham

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The Australian share market has closed slightly lower as a weaker resources sector and low consumer confidence weighed on sentiment.

Lonsec senior client adviser Michael Heffernan said uninspiring leads from overseas markets, lower iron ore prices affecting mining stocks, and two surveys showing flat consumer confidence had contributed to the modest drop.

Two separate surveys show that consumer confidence remains in the doldrums, with households worrying about the impact of the May budget's spending cuts on their finances.

"Hence the market sort of did nothing today," Mr Heffernan said.

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He said investors initially reacted negatively to a profit downgrade by travel agency Flight Centre but then reversed direction after concluding that the downgrade was not so bad after all.

In the resources sector, global miner BHP Billiton fell 34 cents to $35.94, Rio Tinto was 24 cents lower at $59.40, and Fortescue Metals shed nine cents to $4.54.

West Australian iron ore miner Aquila Resources was 12 cents higher at $3.61 as Mineral Resources appeared to be positioning for a bidding war for Aquila.

Engineering firm Downer EDI plunged 59 cents, or 11.15 per cent, to $4.70 after BHP Billiton cancelled a $360 million mining services contract with Downer at a Queensland coal mine.

The major banks were mixed. National Australia Bank scraped off one cent to $33.63, Commonwealth Bank backtracked 22 cents to $82.20, Westpac gained 12 cents to $34.75, and ANZ added 14 cents to $33.90.

In the retail sector, travel agency Flight Centre was 53 cents higher at $46.43 despite cutting it profit forecast.

KEY FACTS

* On Wednesday, the benchmark S&P/ASX200 index was down 15.7 points, or 0.29 per cent, at 5,454.0 points.

* The broader All Ordinaries index was down 16 points, or 0.29 per cent, at 5,432.5 points.

* The June share price index futures contract was 18 points lower at 5,459 points, with 20,469 contracts traded.

* National turnover was 1.24 billion securities worth $3.17 billion.

* The price of gold in Sydney at 1700 AEST was $US1,262.70 per fine ounce, up $US7.40 on Tuesday's price of $US1,254.80.

iron ore

RIO DE JANEIRO — Vale’s status as the most generous payer of dividends among major miners will be put to the test if iron-ore prices do not stabilise after falling to two-year lows.

Higher cost of freight means Rio de Janeiro-based Vale earns $10 to $15 less per metric tonne than BHP Billiton and Rio Tinto, according to Citigroup, making it more vulnerable than its Australian rivals as expanding production and slowing Chinese demand growth push prices below $100 a tonne.

At the same time, Rio Tinto is lifting output faster than Vale, allowing the London-based firm to displace more higher-cost competitors and gain market share.

While asset sales and cost cutting mean the world’s largest iron-ore producer’s ability to pay dividends this year and next is assured, next year’s payments are at risk if iron-ore prices continue dropping, according to Citigroup and UBS.

"There is a view amongst some investors in Brazil that Vale’s dividend is intangible," Citigroup equity analyst Alex Hacking said in New York. "Vale can only pay what the iron-ore price affords them to pay. There are iron-ore price scenarios that would require a cut in dividends."

Vale declined to comment on its dividend strategy in an e-mailed response to questions.

"We will deliver free-cash flows to appropriately reduce our debt levels and distribute increasing dividends to our shareholders," CEO Murilo Ferreira said during a May 13 conference in Miami, according to a presentation on the company’s website.

While future payouts will depend ultimately on iron-ore prices, in the most likely scenario Mr Hacking still expects Vale to generate earnings before interest, taxes, depreciation and amortisation (ebitda) of at least $16bn a year, enough for the company to sustain its dividend levels. The analyst has a "buy" recommendation on the stock.

Vale’s estimated dividend yield of 6.7% is the highest among the 10 most valuable mining firms, according to Bloomberg data. BHP and Rio Tinto are forecast to pay about 4% over the next 12 months, the data show.

Vale last month paid $2.1bn to shareholders in this year’s dividends, the first installment of at least $4.2bn it agreed to disburse this year. As metals prices declined, the company has been trimming dividends since 2011 when it returned a record $12bn including a $3bn share buyback. It distributed $4.5bn last year.

A period of iron-ore prices substantially below $100 would reduce Vale’s available cash for shareholder retribution, UBS equity analyst Andreas Bokkenheuser said. "Vale’s after-tax ebitda could fall close to or even below management’s near-term capex (capital expenditure) guidance, leaving little cash leftover for dividends. In this case, dividends would likely decline, unless financed by a ramp-up in debt and or asset sales".

Iron ore extended declines and dropped to the lowest in 20 months on Wednesday on concerns that global supply is gaining faster than demand in China, the biggest consumer of the steelmaking ingredient. Ore with 62% content delivered to the Chinese port of Tianjin fell 1.3% to $96.80 a dry tonne on Wednesday, the lowest since September 2012, according to the Steel Index. The commodity has traded below $110 a tonne since April 28, retreating 28% this year.

Vale expects prices for iron-ore to average $110 over the next two years, Mr Ferreira said on April 3. "The iron-ore price falling to the lowest in 20 months confirms a more negative scenario for Vale," Faros Investimentos economist Fernando Senna said in Rio de Janeiro.

"At $100 per tonne, the dividends are compromised."

Benchmark iron ore will average $120 this year and $115 next year, sliding to $105 in 2016 and $98 in 2017, according to forecasts compiled by Bloomberg.

Vale shares have lost 5.2% in dollar terms in the past year while Rio Tinto and BHP Billiton1 have rallied 16% and 13% respectively.