In a move that could spark another sudden rally for the price of iron ore, Brazilian mining-giant Vale has said that it is considering cutting its output in response to the global supply glut.
Until recently, the message from the world's largest miners was clear. They would continue to work towards higher production volumes in an effort to drive down costs, whilst also squeezing the world's higher-cost miners from the market. Unfortunately for them, that strategy appears to have back-flipped with the iron ore price having more than halved since January 2014, heavily impacting their own margins and overall earnings results.
As a result, Vale, which is the world's largest iron ore miner, said that it could reduce forecast iron ore production by up to 30 million tonnes per annum (Mtpa) over the next two years. As quoted by the Fairfax press, Peter Poppinga, the company's executive director for ferrous and strategy, said "If the market demands it, we are ready to reduce some production flows in the Southeast to optimise and increase our margins even more."
The comments made by Vale are the latest sign that even the world's largest miners are feeling the heat of the commodities crisis. In its most recent quarterly production report, Australia-based BHP Billiton Limited (ASX: BHP) also said that it would put the breaks on its expansion plans – a decision that was seen as the primary catalyst behind the commodity's recent nine-day rally.
Iron ore prices fell for the second straight session overnight, slipping almost 1.7% to US$56.18 a tonne according to the Metal Bulletin. However, Vale's comments may spark another rally for the commodity, which could see it trade above the US$60 a tonne mark.
What this means for the miners
The latest developments from the BHP and Vale camps could provide a huge boost for companies such as Fortescue Metals Group Limited (ASX: FMG), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX), all of which maintain higher operating costs than their larger rivals. All three stocks have risen strongly in recent times as investors have also become more comfortable in the sector and could be set to climb even higher in the event that another rally does eventuate.
Before investors get carried away however, it is vital that they remember that the reduced production rates from the majors are likely to only be temporary. BHP, for instance, will still hit its target of 290 Mtpa, albeit at a slower rate, while Vale made it clear that its reduction would be opportunistic for the near-term to boost margins.
Although there are certainly encouraging signs, the fact remains that there is an enormous imbalance between supply and demand and that is unlikely to change anytime soon. As such, 'Foolish' investors would be wise to continue avoiding the sector altogether – particularly given the market's recent volatility.
