Iron Ore CEO who predicted crash, sees further slump

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

Iron ore has rallied over the past six weeks, topping $70 (R915) a metric ton on the back of a steelmaking recovery in China, the largest user. Prices will likely average $55 (R719) to $60 (R785) a ton 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 $55 (R719) to $60 R785 a ton,” Mkhwanazi said on Tuesday.

A resurgence in steelmaking in China, helped by the seasonal mid-year increase in production, has sparked a 30% rally in iron ore since 13 June, benefiting global low-cost miners such as Australia’s Rio Tinto Group and BHP Billiton Ltd., and Brazil’s Vale SA. 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 $70 (R915) this month, Goldman Sachs Group Inc. flagged prospects for weaker prices, also due to supply expectations. The bank is predicting an average of $47 (R615) next year, it said in a note dated 29 June. Australia’s government also sees sub-$50 iron ore in 2018.

Discretionary Dividends

Kumba, which operates Africa’s biggest iron ore mine, Sishen, in South Africa, said Tuesday 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 $90 (R1 177), Mkhwanazi said prices weren’t justified by fundamentals. The raw material peaked later than month and fell 44 percent to a low in June, before rebounding to $69.48 (R909) on Tuesday, according to data from Metal Bulletin Ltd. On Wednesday, SGX AsiaClear futures climbed as much as 1.2% to $68.60 (R897).

Kumba shares jumped 17% to R203 on Tuesday in Johannesburg, the biggest advance since March 2016. Its majority owner Anglo American Plc gained 6.1% in London.

“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.”