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Iron ore slump to hurt BHP Billiton and Rio Tinto earnings - Citi
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Tuesday, 04 Mar 2014
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SMH reported that a plunge in the price of iron ore has prompted Citi to downgrade its expectations the earnings of BHP Billiton and Rio Tinto this year.

The investment bank has joined Goldman Sachs in tipping the price of iron ore Australia's most lucrative export to crash to USD 80 per tonne within the next 2 years.

Citi analysts led by Mr Clarke Wilkins downgraded their recommendations for BHP and Rio from buy to neutral, with share price targets falling from AUD 39 to AUD 38 and AUD 80 to AUD 74 respectively.

Mr Wilkins forecast a 9% fade in Rio's earnings from 2014 to 2016 saying the lower iron ore prices would offset increased production and cost cuts.

He said that ''Iron ore is the dominant earnings driver for the sector and the only positive ray of light is that USD 80 per tonne iron ore has already been priced in and/or multiples re rate as long expected decline finally happens. BHP was rated neutral with gas price upgrades and diversification providing a 'partial offset to iron ore and coking coal pain.

Fortescue Metals was also downgraded to neutral, with Citi's price target for the stock falling from AUD 6.70 to AUD 5.90. Meanwhile, Atlas was downgraded to sell while the same recommendation was maintained for Mt Gibson.

Mr Wilkins said that ''Atlas continues to extend the life of the trucking model through exploration success. But our concerns over its ability to fund next stage of growth become even greater at lower iron ore prices.''

He said that the main driver for Citi's downgrade in the price of iron ore was producers flooding the market and resilient' Chinese domestic production. 'As with other commodities that have tipped into surplus we expect the price to fall deeper into the cost curve than the market expects.

He added that short term we expect rising Chinese steel production rates and inventory draw down to buoy iron ore prices and stocks but ultimately both get dragged down by the overwhelming increase in iron ore supply.'

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