'Value not volume' the new mantra as iron ore majors slow down

Things have changed in the land of the red dust. In Australia, BHP Billiton and Rio Tinto have lifted their boots off the iron ore expansion pedals. In Brazil, Vale has plenty of gas left in the tank, but doesn't want to boast about it. The game of 'who drives the biggest SUV?' suddenly seems in poor taste.

In Western Australia, the major producers' expansion machines, well-oiled and efficient over the past five years or so, have developed some technical hiccups of late and need to spend more time with the mechanic. Rio's driverless train network in the Pilbara, which has been slowly rolled out since 2014, has software issues with some computers refusing to talk to the others. BHP's iron ore supply chain, meanwhile, has been slowed down while maintenance work is carried out, chief executive Andrew Mackenzie said in August, while announcing a record financial loss for FY2015-16.

Mackenzie said iron ore prices had been supported this year in large part due to a slower than expected ramp up of new low-cost supply from international producers. That comment no doubt elicited a wry smile from Cliffs Natural Resources chief executive Lourenco Goncalves, who has accused the Australian miners of destroying value by bringing on so much supply.

Mackenzie's peer at Rio, Jean-Sebastien Jacques, in the job only since July, perhaps best summed up the 'new normal' for iron ore this month, when he said it was now about "value not volume."

Whether this was an implicit criticism of previous strategies is up for debate (Goncalves believes it is and that the penny has finally dropped with BHP and Rio…). But the fact that Jacques effectively shelved the massive greenfield Simandou iron ore project in Guinea on almost his first day in the job may provide some clues. Rio's former iron ore head Andrew Harding, and his rival at BHP, Jimmy Wilson, both departed this year, and with them their more bullish views on the iron ore market it would appear.

Supply slowdown

But it is clear there is no longer any rush Chez BHP and Rio to bring on net new iron ore supply. The Anglo-Australian companies' shareholders wouldn't thank them for it; iron ore prices appear to have settled into a $55-60/mt CFR range, margins are pretty good, so what's the rush? China has produced more steel this year than most people expected but steel consumption is slowing, and the market share pie is going to get smaller.

Rio has another 10-20 million mt of iron ore capacity in its locker, while BHP could get out another 20-25 million mt. This would take production capacity at the two miners to 350-360 million mt/year and 285-290 million mt/year respectively. But next year may only see them add another 5 million mt or so each.

Including the new Roy Hill mine in Western Australia, along with some incremental tons from Fortescue Metals Group, Australia may only bring on an additional 30 million mt or so in 2016. This is less than half the volume forecast by many market experts at the start of the year.

Vale has scaled back its production and export outlook for this year to 340 million mt, which would be just 7 million mt more than last year. But the Brazilian company does have a major project in the works with the 90 million mt/year nominal capacity S11D.

But in comments to Australia's Fairfax media this month, the company seemed almost apologetic about its new supply plans. "This all won't happen in only one year but over a period of more than three years; it's not 90 million [tons] net increase but 75 million [tons]," Vale said.