Slashing of iron ore production targets likely to lead to price rises

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Iron ore production targets are being cut by some of the biggest iron ore miners in the world, and the move looks set to lead to price rises in the sector.

The third-biggest producer of iron ore in the world, BHP Billiton, announced last week that it was to lower its output guidance for this year by 10 million tonnes. Meanwhile, the second largest producer in the world, Rio Tinto, confirmed that it is to slash its forecasted guidance for next year by 20 million tonnes. Rio Tinto maintained its 2016 guidance at 350 million tonnes. It is thought that these moves by the major players in the sector will help to bring an element of balance back to the commodity and lead to large price gains over the coming years.

Bad weather has been blamed for some of the changed output projections – earlier this year, a major cyclone affected the iron ore mining area, the Pilbara, in western Australia, stalling production. Inclement weather also caused a dam collapse which affected iron ore production capacity at Samarco, a company that is owned by BHP and Brazilian miner Vale. Meanwhile, Rio Tinto has put its diminished production down to a delay in the roll out of its new driverless train concept.

All of these lowered production projections could be positive for the sector as a whole regarding prices, and for investors too, said Angus Nicholson, market strategist at IG. "This is quite positive for the spot price. As more major miners cut production, concerns about oversupply could finally be cooling down," he told CNBC.

The overall iron ore price fell by almost 40 per cent over the course of the last year due to a massive glut in supply, but it has bounced back from this drop and is now seeing prices of more than 40 per cent higher compared to the same period a year ago. This rise is due mainly to boosted demand from the Chinese market, which called for a 6.5 per cent increase in the level of iron ore imports over the first quarter of this year.

As iron ore is a major component of steel, a rise in the demand for steel has meant that the iron ore market benefits. This has been seen particularly in Beijing, which is making good use of its financial resources to stimulate its property market and industrial production as its economy stagnates. As both of these sectors require massive amounts of steel, this is good news for the iron ore industry.

Regarding other positives for the commodity, lower production targets were good news from a supply-and-demand perspective, confirmed Peter O'Connor, Shaw and Partners' metals and mining analyst. He said that these objectives created a far "better sense of balance" across the globe. The lowered projections from major suppliers including Rio Tinto means that, effectively, 30 million tonnes of new iron ore will not be entering the marketplace, which means that higher demand and a tighter resulting market could be on the cards for next year.

Experts agree that iron ore's price should be able to remain above the all-important market rate of $60 a tonne over the coming months, thanks to the lower production projections from some of the world's biggest iron ore suppliers.

Jonathan Barratt, chief investment officer of Ayers Alliance Securities, told the publication: "The price rise is sustainable. We probably will not see the lows of $30-$35 for a while and if we do see a correction, it would be a correction that I'd buy into."

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