JSE stock index down, as iron-ore firm’s rout deepens

THE selloff that made Kumba Iron Ore Ltd. the worst-performing South African stock is poised to persist as a rout that pushed prices for the steel-making ingredient to 10-year lows deepens.

Kumba, the Pretoria-based unit of Anglo American Plc that operates the continent’s largest iron-ore mine, fell 43 per cent this year, the biggest retreat on the FTSE/JSE Africa Top40 Index and 171-member FTSE/JSE Africa All Share Index. The shares led declines on both gauges on Friday.

The decline followed an almost 80 per cent drop in iron-ore prices since the start of 2014 after the some of the biggest producers — Rio Tinto Group, BHP Billiton Ltd., Fortescue Metals Group Ltd. and Vale SA — fueled a supply surplus by boosting low-cost output and as China’s economy grew at the slowest pace in more than two decades. Kumba responded by reducing dividends, slashing capital expenditure and cutting jobs as margins declined.

“There is still downside until such time as we see meaningful cuts in iron-ore production worldwide,” Troye Brady, an analyst at Noah Capital Markets (Pty) Ltd. in Johannesburg who has a sell recommendation on the stock, said on Thursday. “In a market as highly oversupplied as iron ore, it’s very hard to determine the bottom.”

Ore with 62 per cent ferrous content at the Chinese port of Qingdao rose 0.6 per cent to $48.34 a dry ton on Thursday, according to Metal Bulletin Ltd. Prices fell to $47.08 on April 2, the lowest since 2005, based on daily and weekly data from Metal Bulletin and annual benchmarks for ore delivered to China compiled by Clarkson Plc.

Prices may drop to as low as $30 a ton before the four largest producers, which account for about 60 per cent of global seaborne iron-ore trade, cut capacity, Kenneth Hoffman, an analyst at Bloomberg Intelligence, wrote in a March 31 report. China may give subsidies to domestic iron-ore miners, according to the state-run Shanghai Securities News.

The support may keep high-cost producers in business, risking a prolonging of “the global glut that’s hammering prices,” Yi Zhu of Bloomberg Intelligence wrote in a report on April 8.

Unit costs at Kumba’s Sishen mine were $30.60 a ton in 2014 and $24.84 at Kolomela, its two largest operations, the company said on February 10. It is considering shutting its Thabazimbi mine.
Kumba may need to cut back on spending to maintain production at the Sishen mine, lowering future output, Noah’s Brady said.