Although ASX edged a little up on September 22, 2017, the blow to most of the iron ore miners came from the steep drop in iron ore price that slumped over 5% to $US66.09 a tonne on September 21, 2017 at the back of future demand in China (which is the key consumer of iron ore) and tightening US monetary policy. The iron ore prices have been speculated to be poised to fall lower given the demand supply scenario and global macro viewpoint.
Iron ore, which is used as a raw material for making steel, has been down over 15% since September beginning compared to the August figure of spot price of iron ore at $US78.91 a tonne. The benchmark China’s Dalian Commodity Exchange contract has fallen 17.6% from its peak of 601.5 yuan a tonne in August. Singapore-traded futures, priced against the Steel Index spot assessment, plunged 7.8% from their high level during early September.Market now expects a further fall in Dalian Commodity Exchange as the same is still above the 2016 year-end price.
Primarily, China’s move to support lessening of pollution has continued to pose pressure. China is thus focussing on cutting its steel production and this is expected to impact the key Australian iron ore miners – BHP Billiton, Rio Tinto and Fortescue Metals. At present, the iron ore price scenario has been further deteriorated by the US Federal Reserve’s decision to tighten monetary policy that entails an interest rate hike in December and other changes to its balance sheet scenario. The recent Reserve Bank of Australia’s meeting echoed the voice that iron ore has peaked and the boom might come to an end now.
While this wave of disappointment was still slurring through the market, Rio Tinto’s (ASX: RIO) latest announcement on buying back shares eased the market sentiment to some extent. The mining giant is buying back another $US2.5 billion of its shares funded by the proceeds of the sale of Coal & Allied to Chinese-supported, Australian listed coal miner Yancoal. The buy-back is said to be executed through a combination of an off-market buyback worth $US560 million for the Australian-listed shares and another $US1.9 billion -allocation to the existing on-market buyback program for London-listed shares. This is the third buy-back program by the group in this year; and through this, RIO sits in line with its aim to deliver superior value to its shareholders. The group had announced two buyback programs worth $US500 million and $US1 billion earlier this year. In total, the group’s efforts have led it to deliver shareholder returns of about $US8.2 billion this year in the form of dividends and share buy-backs. The success has come for the group from its debt cutting efforts while maintaining a strong balance sheet in the sector and a disciplined capital allocation process. This might also set a trend for miners who can cut back on debts and ease the capital position and aim for returning cash to shareholders. A part of the market is expecting BHP Billiton to follow the path, particularly, when BHP gets to receive the proceeds from the sale of its shale division. However, ratings agency Fitch has signalled that BHP’s credit profile might be under pressure if the miner divests shale gas assets together with enhancing the level of shareholder payouts.
RIO surged 0.7% on September 22, 2017 with this buy-back news while BHP edged lower by 0.15%.
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RIO’s Buy-back Timetable (Source: Company Reports)
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