China, Australia to talk iron ore demand as BHP, Rio drive glut

[SYDNEY] Australia's Treasurer Joe Hockey plans to discuss iron ore demand with his Chinese counterpart after rising output from BHP Billiton and Rio Tinto Group helped drive the metal's price below US$50 a metric ton this month.

Australia, the world's biggest supplier, is contemplating a price as low as US$35 in next month's budget, while Citigroup and UBS Group AG cut forecasts in response to higher production and weaker demand from China, the biggest consumer. The slump is eroding tax revenues and forcing smaller miners to shut, with Atlas Iron saying on Friday it's halting output.

"I will be speaking with the Chinese finance minister in Washington about expected demand for iron ore over the next 12- months and beyond," Mr Hockey told reporters in New York. "Obviously we don't control commodity prices, but I think everyone has a responsibility to ensure that our supply to key markets is consistent, predictable and reliable." Standard & Poor's on Monday placed the credit ratings of eight iron-ore producers - including BHP, Rio, Vale , Fortescue Metals Group and Anglo American - on "watch negative" after lowering price assumptions through to 2017.

Mr Hockey estimates the government loses AUS$2.5 billion (US$1.9 billion) in revenue for every US$10 drop in the price, which has fallen from a peak of more than US$190 in February 2011.

"Frankly, when you have an iron ore price that has dropped as dramatically as it has in the last 12 to 18 months, we've got to build shock absorbers into our system to cope with it," Mr Hockey said, who is in the US to attend a meeting of Group of 20 finance ministers.

China, which buys about two-thirds of iron ore transported by sea, grew last year at the weakest pace since 1990 and will probably slow further in 2015. The country's consumption of iron ore will probably remain weak as steel demand contracts, according to the China Iron & Steel Association.

Rio plans output of 330 million tons this year from 295 million in 2014, while BHP targets 225 million tons this fiscal year from 204 million. Vale expects to produce 340 million tons this year. Fortescue will maintain current output levels of 165 million tons, Chairman Andrew Forrest told the Australian Financial Review.

The premier of Western Australia, whose state includes the ore-rich Pilbara, where the bulk of Australian supply is concentrated, accused BHP and Rio of pursuing a flawed strategy of boosting output into an oversupplied market and said they should slow growth.

"The signal's going out to the market that there's going to be ever-increasing amounts of iron ore available even at lower prices," Colin Barnett said in an interview in Singapore on Sunday. "The market signal is wrong, and I believe the major companies have a flawed strategy. I don't think it's good business for them or their shareholders."

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