Brazilian steelmaker Gerdau SA on Wednesday signaled it may scale back plans to expand its iron-ore mines as prices for the commodity hover near five-year lows.
“The pace of investments in mining is being revised,” Chief Executive Andre Gerdau Johannpeter said in a conference call. The company has two iron ore mines in Minas Gerais state.
Gerdau on Wednesday reported a 59% drop in its third-quarter net profit, to 262 million Brazilian reais ($104.3 million), due mainly to lower steel demand in Brazil, where the economy fell into recession earlier this year, and elsewhere in Latin America.
Latin America’s largest steelmaker, Gerdau until recently was planning an aggressive effort to increase its iron-ore production nearly fourfold between 2012 and 2020 to feed fast-growing demand from China’s steel industry. Iron ore, the main raw material in steel, was more profitable to produce in recent years.
But growth in China has slowed, and Gerdau wasn’t alone in its expansion plans. Recent production ramp-ups by much bigger iron-ore miners such as London-based Rio Tinto PLC have driven prices for the commodity down 40% from year-ago levels.
Gerdau’s iron-ore mining and logistics capacity is currently 11.5 million metric tons a year, up from 6.5 million tons in early 2012. Plans to expand that further—to 18 million tons in 2016 and 24 million tons in 2020—are now in question, Mr. Johannpeter said in a conference call with journalists.
“In the face of this market scenario, a review is necessary,” Mr. Johannpeter said.
The company’s iron-ore division posted far weaker results in the third quarter of 2014 than in the year-ago period, reflecting the drop in prices. The division’s Ebitda margin—a measure of profitability calculated by dividing earnings before interest, taxes, depreciation and amortization over total revenue—sank to just 4.8% in the third quarter of this year, compared with 39% a year earlier.
That compared with a companywide Ebitda margin of 16.5%.
Mining companies around the world are feeling the burden of lower prices for iron ore, which came to be seen as a must-have product in their portfolios during the last decade’s commodity boom.
Executives at the world’s biggest mining companies, including top iron-ore producer Vale SA, have said they expect smaller, higher-cost producers to shut down at current prices. Iron ore currently sells for around $77 per metric ton at Chinese ports, according to data provider the Steel Index, compared with $136 a year ago.
Cleveland-based Cliffs Natural Resources Inc. took a $6 billion write-down last month that was mostly related to iron-ore assets. The company is now seeking partners for an iron-ore mine in Canada and is looking to sell some assets.
Gerdau on Wednesday also cut 2014 investment budget by 12.5%, to 2.1 billion Brazilian reais, a three-year low, according to Mr. Johannpeter. He said that decision reflected “the global scenario of the steel industry and the volatility of the sector’s results.”
—Rogerio Jelmayer in São Paulo contributed to this article.
Source: The Wall Street Journal
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