Kumba Iron Ore chief executive officer Themba Mkhwanazi correctly predicted in February that his company’s commodity would plunge 40 per cent. After a recent recovery, he expects it to fall again.

Iron ore has rallied over the past six weeks, topping $US70 a tonne on the back of a steelmaking recovery in China, the largest user. Prices will likely average $US55 to $US60 a tonne in the second half, Mkhwanazi said in an interview.

“When you look at fundamentals — port stocks, activity around steel production — it’s very supportive of a price range of $US55-$US60 a tonne,” Mkhwanazi said this week.

A resurgence in steelmaking in China, helped by the seasonal mid-year increase in production, has sparked a 30 per cent rally in iron ore since June 13, benefiting global low-cost miners such as Australia’s Rio Tinto Group and BHP Billiton, and Brazil’s Vale. But the higher prices have also prompted producers in China and India to increase supply, said Mkhwanazi.

“We’re likely to see some moderation because the high-cost supply has now come back in to the market,” he said.

He’s not alone in forecasting lower prices. Before iron ore rose back to $US70 this month, Goldman Sachs flagged prospects for weaker prices, also due to supply expectations. The bank is predicting an average of $US47 next year, it said in a note dated June 29. Australia’s government also sees sub-$US50 iron ore in 2018.

Kumba, which operates Africa’s biggest iron ore mine — Sishen — in South Africa, said this week that it plans to resume dividends after a two-year hiatus caused by plunging prices. The payouts will be “discretionary” in the future, rather than based on an earnings ratio, to ensure the ability to weather a downturn, Mkhwanazi said.

In February, when iron ore had rallied past $US90, Mkhwanazi said prices weren’t justified by fundamentals. The raw material peaked later than month and fell 44 per cent to a low in June, before rebounding to $US69.48 on Tuesday, according to data from Metal Bulletin Ltd. On Wednesday, SGX AsiaClear futures climbed as much as 1.2 per cent to $US68.60.

?”We have to make sure that we heed the lessons of the past,” Kumba’s acting chief financial officer Johan Prins said. “We don’t want to get into a gearing position. That implies keeping some cash on the balance sheet.”
Source: Australian Financial Review

• [Editor:Wang Linyan]