Iron ore majors raise supply

Published Mar 9, 2015

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Singapore - Global iron ore supplies are set to expand further as the world’s biggest producers press on with capacity expansions, raising shipments of the steel-making raw material into a market facing a record surplus and sinking prices.

Net supplies will increase about 60 million to 75 million metric tons in 2015, in line with a 75 million ton rise in 2014, as mine expansions in Australia and Brazil more than offset closures in China, according to Sanford C. Bernstein & Company. Morgan Stanley predicts a net rise of 63 million tons this year, with production expected to peak in September to October.

Rio Tinto Group and BHP Billiton Ltd in Australia and Brazil’s Vale SA invested billions to raise low-cost output even as prices fell to a five-year low, seeking to boost sales and force less competitive rivals to close. The outlook for supply will be in focus on Tuesday as the heads of Rio and BHP’s iron ore units are set to speak at a conference in Perth, Australia. The gathering will also hear from Barry Fitzgerald, who’s leading this year’s opening of the Roy Hill mine in the Pilbara.

The “main reason for price declines would be the continued push of the majors into a demand environment that does not need the tons”, Paul Gait, a London-based analyst at Bernstein, said in an emailed response to questions. Almost all of the new supply this year will be from Australia and Brazil, he said.

Ore with 62 percent content delivered to Qingdao fell 0.4 percent to $59.49 dry metric ton on Friday after China cut its growth target last week, highlighting concern demand may falter in the largest buyer. That’s the lowest price in daily data compiled by Metal Bulletin Ltd that started in May 2009. Compared with weekly data, it’s the lowest since April 2009.

Surplus widens

Rio, which said in its annual report on Friday that global iron ore supply is growing faster than demand, dropped as much as 2.2 percent to A$59.08 in Sydney, and traded at A$59.33 at 12.12pm local time. BHP was 1.4 percent lower at A$32.17.

Global seaborne supply is projected to increase 4.6 percent this year to 1.43 billion tons, topping the 3 percent growth in demand to 1.25 billion tons, according to Morgan Stanley. The glut will surge from 184 million tons this year to 437 million tons in 2018, the bank estimated in a February 22 report.

BHP kept a production target for 225 million tons this fiscal year from 204 million the previous year, while London-based Rio plans output of 330 million tons from 295 million in 2014. Vale expects to produce 340 million tons. The three miners, which accounted for about 57 percent of global shipments last year, are paring costs to preserve margins as prices slump.

Not rational

It’s not rational for the biggest suppliers to reduce output to hold up the price as that would only encourage high-cost mines to keep producing, according to Andy Xie, a Shanghai- based independent economist. Prices will slump into the $30s as output grows further, Xie said in an interview last month.

Rio Chief Executive Officer Sam Walsh said last month that if his company cut output, forfeited supply would be made up by competitors, adding that producers made decisions independently. He described price forecasts such as Xie’s as “fantasy land”, and predicted further closures of high-cost supply.

Imports by China totalled 67.94 million tons in February, the highest total on record for the month, according to customs data on Sunday. The figure, which compared with shipments of 78.62 million tons in January, was the lowest since November.

Rio’s operations in Western Australia can supply ore from the country for about $24 a ton, according to an estimate from Morgan Stanley. BHP’s free-on-board cost from Australia is $30 and Fortescue Metals Group Ltd’s is $29, the bank said.

Property slump

China, which buys about two-thirds of seaborne supply, set a 2015 economic expansion goal of about 7 percent, the lowest in more than 15 years, as leaders tackle industrial overcapacity and a property slump. While the Chinese government has vowed to move away from expansion at all costs, the central bank cut interest rates for the second time in three months on February 28.

“There’s only one reason that matters for ore prices: China’s economic growth,” Tom Price, a Morgan Stanley analyst in London, said in an email. The country’s policies to deliver economic growth of about 7 percent will probably keep iron ore trade flows and prices stable, rather than driving them sustainably above current levels, he said by email. Morgan Stanley sees iron ore averaging $79 a ton this year.

Andrew Mackenzie, chief executive at BHP, said last month a “degree of pressure downwards” is seen for iron ore, while signaling concern about the industry’s expansion plans. “I do fear that other competitors have an awful lot more capital waiting in the wings to invest,” Mackenzie said after reporting a drop in underlying profit from his iron ore division.

The commodity may average $58 a ton this year, according to estimates by Citigroup and Australia & New Zealand Banking Group Ltd, while Goldman Sachs Group predicts $66. So far in 2015, prices averaged $65.03.

“Iron ore may actually recover to the mid-$70s as demand recovers on the back of stimulus and faster closures of domestic supply” in China, Bernstein’s Gait wrote. “If I am wrong on this, the price could test $50 at the bottom.”

Bloomberg

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