Kumba Iron Ore is having to focus more on its production cost base as the price of iron ore continues to fall, and with it the company’s share price.
Shares in Kumba Iron Ore traded 1.35% weaker at R336.46 in afternoon trade on the JSE on Monday, extending the company’s 5.39% and 44.52% weakening in the past 30 days and year to date period respectively.
This comes as prices of iron ore have continued to weaken. On Monday, iron ore prices sank further to about $91.93 per metric ton.
Seleho Tsatsi, investment analyst at Anchor Capital, has told Business Report in an interview that the softer prices are due to weak demand for the commodity.
“The big driver of demand is Chinese property and infrastructure spending and as we know, Chinese growth has been lacklustre,” Tsatsi said.
“Historically, fixed asset investment (real estate and infrastructure spending) has been the major driver of GDP growth for China but the slowdown that we’ve seen in the real estate has really put pressure on fixed asset investment and in turn on economic growth.”
The lower demand and resultant lower prices for iron ore have been weighing down on Kumba Iron Ore, the South African producer of the commodity. The company is having to put more focus on its cost base.
“In a lower-price environment, cost focus becomes even more important for miners. We’re seeing that at the moment; Kumba announced that it will invest in margin-enhancing UHDMS (ultra-high dense media separation) processing technology at Sishen,” said Tsatsi.
Kumba Iron Ore has also been facing challenges ramping up volumes due to the challenges to do with Transnet rail and port operations. As a result of this, “cost focus is one area through which it is aiming to at least partially mitigate” the challenges Kumba is facing.
In its latest financials, Kumba recorded a 26% decline in earnings driven by lower sales volumes, worse-than-expected price realisations on iron ore due to timing issues.
Kumba’s stockpiles, which are mostly located at its mines, have grown to a high of 8.2 million tons.
The company had a $12 per ton negative impact from worse-than-expected price realisations, with $8 per ton of this coming from products being priced one month after arrival in China, which hurt it during a period of falling iron ore prices.
About $4 per ton also came from provisional pricing effects for unpriced sales late last year. This had “resulted in Kumba’s realised price being much lower relative to the benchmark price than is normally the case,” added Tsatsi.
Anthony Clark, market analyst with Smalltalk Daily, wrote on X on Monday that iron ore prices are down by 36.2% in the year to date comparative. However, in rand terms, iron ore prices had fallen by as much as 40% year to date due to the stronger rand.
“Weak demand in top consumer China and firmer supply overshadowed hopes that the world’s second-largest economy would announce fresh stimulus measures to meet its 2024 growth target,” said Clark.
Analysts from Goldman Sachs revised their forecast for iron ore prices for the fourth quarter of 2024, reducing it by $15 – to $85 per ton.
“The key risk remains a possible drop in exports due to a decline in steel production in China. This could lead to an additional decline in demand for iron ore. Domestic demand is likely to remain weak,” explained Clark.
Worse still, market analyst Charl Botha said “iron ore could still drop materially from current levels”, which would likely further impact Kumba.
BUSINESS REPORT