BHP Billiton president of marketing Mike Henry says the dramatic 31 per cent fall in the iron ore price this year has not come as a surprise, and the world’s largest miner is tipping further volatility in the spot price in the months ahead.

“The decline in iron ore prices wasn’t unexpected for us ... what we’re seeing today in the marketplace is within the range of expectations that we’ve had,” Mr Henry said.

The iron ore industry has endured a rollercoaster 12 months. The final quarter of the financial year saw the commodity fall to 21-month lows at $US89 ($92), with the bulk metal plummeting by nearly a third this year.

It has recovered in the last few days to trade at $US94.70 on Thursday.

“We’ve been saying for a long period of time now that growth rates in China will begin to slow, that you would see steel intensity slowing at an even greater rate than GDP declines, and at the same time you’d see a lot more low cost supply coming to market that would bring prices down,” Mr Henry said after a tour of the miner’s operations in Port Hedland.

He predicts that iron ore prices would “decline over time”.

Analysts remain relaxed about the price slide as the miner, along with its rival Rio Tinto, still make healthy profits at the $US90 level.
Rio Tinto’s ‘breakeven’ sits at $US43 a tonne, while BHP’s is $US45 a tonne.

Yet Fortescue’s is $US72 a tonne and Pilbara producer Atlas Iron has a break-even of about $US82 a tonne, prompting a warning on Thursday from two global credit ratings agencies over the impact of low prices on the smaller miners.

Standard & Poor’s and Moody’s argue that depressed prices are credit negative for Fortescue and Atlas, Australia’s two largest single-commodity iron ore miners.

Fortescue would take a $1.2 billion hit from an $US8 a tonne reduction in iron ore prices at current production levels, according to Moody’s, equating to 11 per cent of 2013 revenue.

Atlas earnings would fall by around $US90 million or 9 per cent of its 2013 revenue under the same scenario.

“As a producer of lower grade iron ore, the discounts that Atlas has taken have widened with the decrease in iron ore prices, further hurting revenue and cash flow,” said Moody’s associate analyst Jason Lu.

S&P says if iron ore prices stay at this threshold, some miners’ key credit metrics “might worsen significantly”.

While BHP and Rio “can accommodate” declining earnings at $US90 per tonne and Fortescue should have a sufficient buffer, Atlas Iron may face short-term pressure.

“Weaker earnings, together with high debt following the term loan B issuance in 2012, could significantly increase its leverage and pressure its credit metrics in the absence of remedial actions taken by the company,” said S&P analyst credit analyst May Zhong.

The Australian government-run Bureau of Resources and Energy Economics in late June lowered its forecast for iron ore prices to $US97 per tonne for 2015, from an estimated average of $US105 per tonne for 2014 reflecting a combination of ­falling demand and rising supply.

The three largest global producers, Rio Tinto, BHP Billiton and Brazil’s Vale, are chasing record iron ore volumes following heavy investment in bringing on new mines in recent years.

However, lower prices have forced the miners to cut costs and improve productivity in an effort to improve their flagging margins.