A growing oversupply in the iron-ore market is damaging the credit quality of producers and poses risks to the downside, says credit ratings, research and risk analysis provider Moody's Investors Service in its ‘Iron-Ore Supply Increases Pose Risk to Market Fundamentals’ sector comment. Owing to an aggressive supply push by the major iron-ore producers, Moody's expects iron-ore prices to remain low over the next several years, with volatility continuing.

"Low-cost producers such as multinational mining, metals and petroleum company BHP Billiton, multinational metals and mining Rio Tinto and multinational diversified metals and mining Vale have more tolerance to absorb some degree of lower prices in the near term than iron-ore mining and beneficiation specialist Cliffs Natural Resources, Australian iron-ore producer Fortescue Metals Group, and Australian mining company and iron-ore explorer Atlas Iron, but the compression of earnings and cash flow is nonetheless value destructive for the sector," says Moody's Investors Service senior VP Carol Cowan.

Moody's estimates over 300-million tons of new and expanded production will come on-stream over the next several years. Given expectations for muted growth in global steel production until at least 2016, the lack of equilibrium will continue to weigh negatively on prices and the operating performance of iron-ore producers.

As a result, Moody's has revised its price sensitivity for iron-ore for the period through 2016 to a range of $75/t to $85/t at an iron-ore grade of 62%. There could be downward rating actions for iron-ore producers as Moody's reassesses the impact of a protracted pricing weakness.

Key assumptions underlying the aggressive supply push by the major producers are that the market position could be maintained, given the number of projects that could be undertaken, that the lower costs associated with higher volumes mitigates the degree of price decline, and that high-cost producers will need to exit the market.

This final assumption that that high-cost producers, particularly in China, will exit the market and reduce supply may take longer than expected to come true, says Moody's. Many of the iron mines and steel companies in China are State-owned, and captive supply within the steel industry could result in sustained operations despite losses.