Production of iron ore in South Africa is set to stagnate at 75 Mt from 2017-2021, as iron ore prices gradually decline and regulatory/infrastructure challenges persist.This is according to BMI Research, a unit of Fitch Group.
In January, Anglo American announced that it expects profits to more than double this year on the back of higher iron ore prices.
The firm, Africa’s third largest iron ore producer, put the key Kumba iron ore mine for sale last year, following a multi-year decline in commodity prices, and rising costs.
The company suffered heavy losses as a result, with net debt peaking at US$12.9 billion in 2015, and underlying earnings falling from $2.2 billion in 2014 to $0.8 billion in 2015.
Since 2016, the company has launched a strategy of severe cost cutting and divestments , including the sell-off of its non-core assets in nickel, iron ore and coal, in order to focus on copper, platinum and diamonds .
While the recent rally in iron ore prices, gaining 90% y-o-y to reach over $80/t as of 1 February 20 17, could incentivise Anglo American to hold off on divesting from the Kumba mine, the sale would prove prudent for the company's long -term outlook, given its elevated debt load.
This positive price dynamic, coupled with the 550% rise in Kumba Iron Ore’s US share price in 2016, presents Anglo with a strategic opportunity to sell the mine at a premium. With the company’s net debt standing at $11.7 billion as of H1, 2016, the sale of the mine in the current price environment would significantly improve on-going debt reduction plans.
Price rally and production rise will be short lived
Despite the iron ore rally since H2, 2016, BMI expects prices to retreat by H2, 2017 and retest recent lows by 2018.
This decline will be driven by high stock levels and an over supplied seaborne market coming from Brazil and Australia. At the same time, China’s property market cooling will outweigh infrastructure spending , which in turn will put further downside pressure on prices.
Even though this price rally will spur major miners such as Anglo to reduce their focus on cost-cutting, new projects will not arise other than those already in the pipeline, as miners are still taking a cautious approach following the commodities downturn of previous years.
As such, BMI maintains a poor outlook for South Africa’s future iron ore production, which it forecasts to stagnate at $75 Mt during 2017 - 2021.
Domestic troubles continue
South Africa’s unreliable power supply and poor infrastructure development also contribute to the almost non-existent iron ore production growth rate over the coming years, as operational disruptions dent output and deter investment.
While investment in power infrastructure is due to rise by over 20% in the next three years, Eskom’s structural problems, combined with unfulfilled investment commitments by the government in the past, will spur continued uncertainty.
Furthermore, a new carbon tax set to be implemented in 2017, and potentially fractious wage negotiations, will hamper investment in the South African mining sector generally over BMI’s forecast period to 2021.