MELBOURNE, Australia--A strategy by the world's biggest mining
companies to keep feeding the iron-ore market even as prices have
tumbled has created another victim.
Australia's Arrium Ltd. said Friday it has been forced to close
one of its two mines, slash 580 jobs and will book a 1.34 billion
Australian dollar (US$1.07 billion) writedown, as the price of the
steelmaking commodity languishes at more-than-five-year lows.
It is the latest upset in an industry where producers including
BHP Billiton Ltd. and Rio Tinto PLC--which can more easily make
profits when prices are low--are continuing to ramp up output, even
as demand from China for iron ore and other commodities cools.
Arrium said it was closing its Southern Iron operation in the
state of South Australia to focus on its Middleback Ranges
business, a move it expects would bring production costs back below
the weakened price for iron ore, which plunged by almost 50% last
year.
The company said it would also rein in capital spending, adding
that the restructuring would cost it about A$70 million in the
current fiscal year, as well as contributing to the hefty
impairment charge.
Arrium, a steel producer spun off from BHP Billiton in 2000, has
in recent years turned to iron ore to diversify and reduce its
reliance on slower demand for its steel products. It changed its
name from OneSteel Ltd. in 2012 to reflect the shift.
Arrium said it now aims to produce about 9 million metric tons
of iron ore a year, sharply lower than the 13 million it had been
targeting. The spot-market price for iron ore has fallen below
US$70 a metric ton, its lowest since mid-2009, as big mining
companies added to a building glut of the commodity, and amid signs
that China's steel mills are struggling to absorb supplies as the
country's economic growth slows.
Analysts have been warning that some smaller iron-ore producers
around the world might be washed out of the market, and that some
projects might have to be shelved because of falling prices and as
big mining companies stick with their aggressive output plans.
"The longer we see prices stay down, the more we're going to see
higher-cost producers curtail production," said Tim Schroeders, a
Melbourne-based fund manager at Pengana Capital.
Rio Tinto, the world's second-largest iron-ore producer after
Brazil's Vale SA, this week said it would produce about 330 million
tons from its mines in Australia's western Pilbara region this year
after digging up 280.6 million tons in 2014--itself a record and up
12% from the year prior.
BHP and another of its rivals, Fortescue Metals Group, have also
been maximizing output from their Pilbara operations. Coupled with
big new mines such as billionaire Gina Rinehart's Roy Hill venture,
Australian exports of the commodity might grow by as much as 100
million tons this year, following a record year for shipments in
2014.
Midsize U.S.-based mining company Cliffs Natural Resources Inc.
has already faced writedowns, laid off workers, and has said it
could offload its Bloom Lake iron-ore mine in Canada. Insolvency
specialists were last year called in to Australia's Western Desert
Resources Ltd. Meanwhile, Chinese conglomerate Citic Ltd. this week
said it would record an impairment loss of up to US$1.8 billion for
its Sino Iron project in Western Australia to reflect the fall in
prices.
Arrium's chief executive, Andrew Roberts, said that despite
efforts to cut costs and spending, the company's mining unit had
been absorbing cash.
The company said it planned to reduced capital spending by about
A$200 million, or 30%, over the next four fiscal years, adding that
an impairment charge of A$1.17 billion would be booked for the fall
in iron-ore prices and the closure of Southern Iron in the fiscal
first half through December.
Another A$130 million would be written off the value of its
steel and recycling operations, it said, while about 200 full-time
jobs would be lost and a further 380 contract positions cut.
Write to Robb M. Stewart at robb.stewart@wsj.com
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