The great iron ore flood claims biggest victim in Anglo American

The giants of the iron ore industry have claimed their biggest victim yet: Anglo American Plc.

The 99-year-old mining company, reeling from a $5.6 billion loss last year, is pulling out of iron ore and Chief Executive Officer Mark Cutifani described a bleak outlook for the material. The exit marks the result of a strategy, employed by the world’s largest producers, of continuing to expand output in the face of plunging prices. BHP Billiton Ltd. has described the tactic as ‘‘squeezing the lemon.”

“We’ve watched competitors in iron ore flood the market,” Cutifani, who’s been at the helm of Anglo for three years, said in an interview with Bloomberg Television on Tuesday. “It will be tough on the supply side for some time.”

Anglo is considering selling its controlling stake in Kumba Iron Ore Ltd., Africa’s top producer. It may also exit Minas Rio, one of the world’s largest mining projects and Anglo’s most expensive ever. The company spent $14 billion to buy and build the Brazilian mine.

“That’s the one way not to make money in this game — buy high and sell low — which is sadly what they’ve done to perfection,” Ben Davis, a mining analyst at Liberum Capital Ltd. in London, said by phone.

Iron Ore Glut

Anglo is giving up on iron ore, the main ingredient used to make steel, with prices down more than 70 percent in five years. In the late 2000s, it followed an industry-wide expansion into iron ore to capture China’s booming appetite for steel and piled on debt to pay for it.

About 1.36 billion metric tons of iron ore was shipped around the world last year, according to Morgan Stanley. That’s 73 percent more than 2007.

The lowest cost producers in the world BHP Billiton Ltd. and Rio Tinto Group have been able to withstand the price slump and are returning multi-billion dollar profits even at current prices. Rio’s Chief Executive Officer Sam Walsh said last year that it would be abnormal for his company to consider withholding supply even as rivals were “hanging on by their fingernails.”

Anglo has paid the price. It couldn’t compete with its higher-cost operations and $12.9 billion debt load. This week, the company reported that losses doubled in 2015 and Moody’s Investors Service cut its credit rating to junk.

Anglo said Tuesday that it’s now focusing on raw materials with better consumer demand, such as gems, platinum and copper. It owns De Beers, operator of the world’s best diamond mines.

Line Drawn

“We’ve gone back to the core businesses we think we’ve got competitive advantage in,” Cutifani said. “We’ve drawn the line.”

For iron ore, the glut could get even bigger. As much as 266 million tons in new production will be added over the next three years before supply is curbed from 2019, according to Bloomberg Intelligence. China’s steel mills, which account for half of global supply, last year posted their first annual decline in output since at least 1991.

Anglo’s move doesn’t mean iron ore supply will be removed from the market. An exit of Kumba may take more than 18 months and it wants to continue to ramp up production at Minas Rio before selling, a process that could take as long as three years, the company said.

“It is a very difficult environment for mining companies to sell assets that are not world class,” Chris LaFemina, an analyst at Jefferies LLC, wrote in a note on Tuesday. “In the case of iron ore and coal, even world class assets would likely be difficult to sell at anything better than distressed prices.”

 – Bloomberg