Kumba Iron Ore (JSE:KIO), the world's fourth largest iron ore producer, expects to continue being less affected by the global drop-off in demand for iron ore compared to other iron ore producers this year, although there is little visibility into the future of iron ore at the moment.
Chief executive officer Chris Griffith said after the company announced stellar financial results for 2008 today that Kombi Iron Ore has been less affected by lower steel production than other iron ore producers due to the high quality of its ore, the geological spread of its customers and the company's customer relationships.
Although steel mills in Europe and Japan have cut their production by as much as 50% by the end of last year and maintained this lower production in the first quarter of 2009, Kumba Iron Ore has found an alternative market for a substantial portion of its production in China, where it is selling its material at a discount to the spot price.
The company has increased its focus on non-contractual customers in China to make up for the shortfall in contractual customers in Europe and has changed its focus in production from quantity to quality since the market deteriorated in the second half of last year, said Griffith.
He added the company would first reduce prices of iron ore exports to China before it cut production as it could still attain healthy margins with a 10-20% reduction in current prices. The production cost of iron ore fines at landing in China ranged between $30-$40/t, while those fines with Fe (iron) content of above 63% are sold at prices exceeding $80/t.
Even if we are not able to sell all volumes and prices are down, we still make a fantastic margin, he said. Kumba Iron Ore could add at least 7mt of iron ore to its stockpiles before reviewing its production levels.
Griffith elaborated that the market was not back to normal yet and although the company was starting to see benefits from the stimulus package in China, it was unable to make up all its volumes lost in Europe and Japan in China. Kumba Iron Ore would not achieve 100% sales in the very short-term.
He added that the big three iron ore producers have started their annual price negotiations and he expected a 10-20% reduction in the $80/t price for fines with Fe (iron) content of higher than 63%. Lump iron ore prices were expected to decrease.
SISHEN SOUTH PROJECT
Kumba's CEO said the company was not taking a firm position on the growth project at this point in time as the market was very volatile. However, management still believed it was right at this point in time to keep investing in the project.
If we see a massive downturn in the market, we would review capex and growth plans. But at this point we believe the right thing to do is to fund the project through debt.
The 9mt per year Sishen South project is on track to deliver its first production in 2012. Kumba has committed R2.5bn ($249m) of R8.5bn ($850m) capital expenditure for the project and has concluded an agreement with Trasnet to increase its allocation on the export channel from 47mt per year to 60mt per year.
Kumba today announced strong 2008 financial results, including attributable profit of R7.2bn ($718m)and headline earnings of R7.3bn ($728m) compared to attributable profit of R3.2bn ($319m) and headline earnings of R3.1bn ($309m) in 2007. The company saw its revenue soar 86% on the back of strong iron ore prices last year and declared a final dividend of R13 ($1.29) per share.