A report released today by a top rating agency said that iron ore prices will need to rise to relieve the ratings pressure facing some of the industry’s top producers.
Standard & Poor’s Rating Service (S&P) has predicted iron ore prices won’t climb much higher in the future and are likely to be less than $100 a tonne beyond 2015.
The rating agency warns that companies willing to defer investment in mining projects, cut operating costs and reduce capital expenses are going to be better off under the ratings squeeze, The Australian reported.
"For heavily indebted miners, their liquidity levels and discretion in reducing costs would be critical to their credit quality," the agency said.
The warning comes after S&P last week lowered its rating on Fortescue Metals Group's debt to B+ from BB-.
With the ore price falling from a record high of $180 a tonne to a low of $90 in the last few months, the price has rebounded to around $100 where analysts expect it to stay.
S&P pointed to single-commodity producers such as Fortescue who rely heavily on iron ore for almost all of their earnings as heavily exposed while companies such as BHP Billiton and Rio Tinto as having financial flexibility, and therefore able t curb the drop in exploring other avenues. S&P rates BHP at A+ and Rio Tinto at A-.
The warning comes as the coal industry is facing an unstable economic climate with what many are calling a volatile market due to a drop in Chinese demand.
With the recent halt in coal mining projects around the country and the loss of thousands of jobs already, the call on companies by S&P to cut review their operating costs may come as another blow for the industry and its workforce.