Crude steel production growth rate dropped three major mines to cut spending

The mining industry’s decades-long boom is cooling, and in the near term, the world’s three major mines have announced news of spending cuts. Brazilian iron ore giant Vale recently announced that its capital expenditure budget for next year will be reduced from $16.3 billion this year to $14.8 billion. This is its three-year reduction in spending budget.

It is worth mentioning that the other two iron ore production giants BHP Billiton and Rio Tinto also cut spending by selling non-core assets. BHP Billiton said that this year's spending level will be cut from last year's $21.7 billion to less than $15 billion. Rio Tinto is also planning to cut spending sharply on the basis of a $2 billion cut this year.

Analysts said that the three major mines cut their expenses based on the judgment of the industry cycle, and in order to improve the profitability, we must find ways to reduce costs. “The golden decade of steel has passed and the overall profitability of the mine is not as good as in previous years.”

Some analysts said that the long-term de-capacity policy of the domestic steel industry will reduce the iron ore demand for the three major mines to a certain extent.

Large mines cut spending

According to foreign media reports, the world's largest iron ore producer Brazil's Vale said that the company's capital and research and development expenditure budget will be reduced by 1.5 billion US dollars in 2014, from $16.3 billion this year to $14.8 billion.

This is the company's third consecutive year to cut capital expenditure budgets, and is the lowest level of spending since 2010. “In the past two years, the overall price of iron ore has declined, which has a great impact on the profitability of the mine.” Qiu Yuecheng said.

Vale Group Chief Executive Murilo Ferreira said the company is working to reduce production costs and develop mines with higher gross margins to strengthen shareholder feedback.

Similar projects are also Rio Tinto Group, the world's second largest mining company. Rio Tinto announced that it has achieved and exceeded its goal of cutting operating expenses by $2 billion by the end of the year, and said it will give priority to repaying corporate debt next year.

It is understood that Rio Tinto has laid off 3,800 people since 2012, and 3,000 employees have been forced to lay off due to asset sales.

On December 3, Rio Tinto CEO Sam Welsh said in a statement, "We are cutting capital expenditures and will further reduce spending."

Data show that Rio Tinto’s net debt last year has risen to more than $19 billion, and it is urgent to cut spending to expand profits to maintain its credit rating. In the next two years, Rio Tinto will further reduce spending. In an investor briefing, they said that next year's budget will be reduced from about $14 billion this year to $11 billion. By 2015, the capital expenditure budget will be controlled to less than $8 billion.

Australian iron ore giant BHP Billiton also recently hinted that it might try to keep the company's annual spending within $15 billion. In the current fiscal year, BHP Billiton set a budget of about $16.2 billion. Company CEO Andrew Mackenzie said publicly that the company has cut spending significantly in the fiscal year ending June 30, 2014, and plans to cut spending further in the next few years.

Slowdown in demand

BHP Billiton said in its annual report that as demand for iron ore in China and other regions slows, global mining companies need to shift their focus to cost control.

Take China as an example. In 2014, the expected increase in crude steel production in the country will slow down. Demand for iron ore is also falling. China Metallurgical Industry Planning and Research Institute estimates that the growth rate of crude steel production in 2014 will slow down from 6.7% this year to 3.8%.

Iron ore prices have been on a downward trend since 2011. According to Qiu Yuecheng, the price of iron ore remained above US$180/ton from 2009 to 2010, and the highest was over US$200/ton. He believes that this trend will continue, because 2014~2015 is the concentrated release period of new capacity of mines. "But the growth rate of global crude steel production has slowed down significantly, and it is difficult to digest the increase of iron ore."

Jose Carlos Martins, head of the Vale Iron Ore and Strategy Department, also expressed similar views. He believes that due to the reduction of steel consumption in China and the continuous increase in production by mining companies, the production capacity of iron ore producers will exceed 5% to 6% of demand by 2018; by 2020, global iron ore production capacity may reach about 1.6 billion. Tons, while consumption is expected to be 1.5 billion tons.

The industry believes that the domestic steel industry will carry out long-term de-capacitization process in the past five years, and the demand for iron ore and other raw materials will be greatly weakened. “After the end of the long agreement price in 2010, the price of external mines is mainly dominated by index pricing and bidding. The increase of overseas equity mines in China in the later period will weaken the pricing monopoly of the three major mines to a certain extent.

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