June 12, 2014 9:34 AM ET
By
Shuli Ren
Morgan Stanley lowered its 2H2014 forecast for the price of iron ore to an average of $95 per ton, saying that there is too much iron ore coming from low-cost Australia and Brazil.
As such, the broker downgraded Brazilian iron ore producer Vale (VALE) from Buy to Hold, with a new price target of $15.20. Vale generated around 94% of its EBITDA earnings from iron ore last year. Shares of Vale closed at $13.19 yesterday.
In the past, when the price of iron ore dipped below $100/t, it bounced back quickly, because the high-cost Chinese producers would have to close shop and the global supply would fall.
This time is different. There is now too much iron ore coming from the sea. Morgan Stanley estimates the Big Four – Rio Tinto (RIO), BHP Billiton (BHP), Fortescue Metals (FSUMF), and Vale – can import 111 Mt into China this year at an average cost of $43/t. Next year, they can import similar quantities but at $33/t only.
This is largely because the Australian producers have ramped up production in response to China’s super commodity cycle. Here are analysts Joel Crane and Rachel L Zhang:
The global seaborne iron ore market has enjoyed an impressive period of tight or undersupplied market conditions since the China-driven commodity ‘supercycle’ began in 2005. China’s crude steel consumption and production grew much faster than expected, and the global mining community was left unprepared. Iron ore is not a rare commodity, but it is a difficult one to mine, process, and transport at a reasonable cost. As the supply shortfall continued to increase and price increased, global miners (especially in Australia and Brazil) began to respond in full force. Today, we are seeing the manifestation of that response, and the global seaborne iron ore market is set to enter into a new period characterized by oversupply.
On Vale, Morgan Stanley has:
Cut 2014–17e EBITDA by 25–38%, or 30% below consensus, as lower iron ore prices more than offset an improving base metals business.
Price of Vale fell 2.9%