Iron ore slump may put smaller miners out of business, says Goldman Sachs

Slump in the iron ore market has the potential to put small to mid-tier independent mining companies out of business, according to Goldman Sachs.

In a report published on Thursday, the global investment bank said the iron ore market malaise could put up to 50% of production from mining companies outside of the big three – Rio Tinto, BHP Billiton and Vale – at a huge risk while trio will cope with the situation better.

Goldman expects global demand to peak at about 1.4 billion tonnes in 2016 as the wider industry facing “an existential challenge".

Overall, its estimates the dip in production from mine closures this year to reach 126 million tonnes and 123 million tonnes in 2016. The bank also cut its 2015 iron ore price estimate by 18% to $52 per tonne. It forecast $44 in 2016 and $40 in 2017 and 2018, down 29% to 33% from previous estimates.

Prices for iron ore delivery in China continue to lurk below $50 per tonne, fetching on average little more than $46-47. Meanwhile, Moody’s said supply reductions were likely to be dwarfed by planned increases by bigger mining companies, estimated to exceed 300 million tonnes in the years to 2019.

The agency said the iron ore price could get stuck below $40 both this year and next. "At current spot iron ore prices in the mid-$40 per tonne range, BHP Billiton, Rio Tinto and Vale are likely approaching breakeven, while others, such as Fortescue Metals Group, could turn negative," Moody's noted.

It also warned that the likelihood of outlook or credit rating changes in the mining sector remains “heightened".

Last week, mid-tier Australian miner Atlas Iron, which has seen a 30% decline in its share price since January, announced that it would shut all of it mines and halt exports to Asia while it reassess its financial situation.

Steelmaker Arrium has closed one of its two iron ore mines in Australia. In March, Fortescue was forced to cancel a planned debt sale following lack agreement with investors and persistent oversupply in the market.

Iron Ore Company of Canada, which is majority-owned by Rio Tinto, recently said it would be cutting 150 jobs indefinitely from its mine in Labrador City, Newfoundland, Canada, as of 14 June, as the sector continues to struggle.

Credit Suisse, Barclays, UBS and Deutsche Bank have all slashed their forecasts for iron ore, with Deutsche Bank predicting a sub-$40 level before the price finds a floor, pretty much in line with downbeat sentiments expressed by Moody’s and Goldman Sachs.

At 10:27 BST on Thursday, Rio Tinto's share was down 0.69% while BHP Billiton was up 1.36% in European trading.