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Melbourne - Iron ore is heading toward its first surplus in at least a decade as output expands and Chinese steel mills, the biggest buyers, boost production at the slowest pace in five years.

Seaborne supply will advance 9.1 percent and demand 8.3 percent in 2013, led by exporters from Perth-based Fortescue Metals Group to Vale SA, Morgan Stanley forecasts.

A surplus will emerge in 2014 and keep widening until at least 2018, the bank predicts.

Prices will slump as much as 34 percent to $90 a ton by the end of December, according to the median of seven analyst estimates compiled by Bloomberg.

Exports of the biggest seaborne cargo after oil are surging the most since 2010 after prices jumped as much as sevenfold in the past nine years.

Goldman Sachs Group expects China’s imports to climb 4 percent in 2013, the least in three years.

Its steel output will expand 2.6 percent as the nation’s economy grows at the second-slowest pace in the past decade, according to estimates from Morgan Stanley and economists surveyed by Bloomberg.

“We’ve got a steady lift of supply, mainly out of Australia,” said Tom Price, the Sydney-based analyst at UBS AG who has covered the market for about a decade.

“We’ve observed for a couple of years now moderation in demand growth in China. A combination of those two is why we’re bearish.”

Raw Materials

The commodity has tumbled 15 percent to $135.60 from a 16- month high in February, according to a gauge for China from The Steel Index, a unit of McGraw-Hill.

Iron ore’s drop of 6.4 percent this year compares with the 1.4 percent fall in the Standard & Poor’s GSCI gauge of 24 raw materials.

The MSCI All-Country World Index of equities rose 5.1 percent and Treasuries were little changed, a Bank of America index shows.

Exports will advance to 1.178 billion tons this year, as demand expands to 1.258 billion tons, Morgan Stanley estimates.

The implied shortfall of 80.7 million tons will switch to a surplus of 3.3 million tons in 2014, rising to 291 million tons in 2018, the bank forecasts.

Iron ore accounted for 78 percent of earnings before interest, taxes, depreciation, and amortization last year for London-based Rio Tinto, the biggest supplier after Rio de Janeiro-based Vale, data compiled by Bloomberg show.

For Melbourne-based BHP Billiton, the third-largest exporter, it contributed 44 percent.

Vale, Rio, BHP and Fortescue supply 71 percent of seaborne cargo.

Trading Volumes

The swaps market is already anticipating lower prices through 2013 and into next year.

The December contract is at $119.75, compared with $136.75 for this month and $115 a year from now, data from GFI Group show.

Trading volumes in derivatives more than doubled in the past year, exceeding 18.3 million tons in February, according to The Steel Index.

The anticipated decline may be curbed by the need for steelmakers to replenish inventories, which tumbled to a four-year low at Chinese ports last month, according to Beijing Antaike Information Development, a state-backed research company.

Stockpiles are now below average and that will support prices, Morgan Stanley analysts Peter Richardson and Joel Crane said in a March 7 report.

The bank, which says the full-year market consensus for iron ore is too bearish, is forecasting $133 for 2013 and lower prices every year until at least 2018.

China’s Recovery

While China’s economic expansion is weaker than the average of the past decade, it’s accelerating after two years of slowing growth.

The 8.2 percent projected for this quarter in a Bloomberg survey of 32 economists is more than four times the pace of the US Manufacturing reached an 11-month high in March, according to data from the National Bureau of Statistics and China Federation of Logistics and Purchasing.

Additional supply may not come as fast as some analysts are predicting because it can take as long as three years for new mines to reach full capacity, Melinda Moore, an analyst at Standard Bank Plc, wrote in a March 25 report.

The 14 percent drop in Chinese imports in February from the month before was “hardly surprising” after bad weather hurt supply, she wrote.

Shipments from India, which peaked at 114 million tons in 2009, will slump to 20 million tons in 2013, Morgan Stanley estimates.

Deutsche Bank AG is predicting 14 million tons after Goa, once the top exporting state, banned all production in September to curb illegal mining.

That propelled South Africa into third place for exports last year, according to London-based Clarkson, the world’s largest shipbroker.

Monetary Fund

Western European demand this year will be unchanged from 2010, according to Morgan Stanley.

The 17-nation euro region has tumbled back into its second recession in four years.

The Washington-based International Monetary Fund cut its estimate for global growth three times since July, to 3.5 percent.

Shares of Rio fell 13 percent to 3,061.50 pence this year and will reach 4,013 pence in 12 months, the average of 23 analyst estimates compiled by Bloomberg show.

BHP tumbled 14 percent to A$31.75 in Sydney trading, with the stock projected to rebound to A$39.45 in a year, based on 17 forecasts.

Morgan Stanley’s forecast for average prices of $133 this year would still be more than five times the average in 2004.

The seaborne market also faces a threat from Chinese output, which typically increases as prices rise because the ore has lower-than-average iron content.

Idled Chinese mines with annual capacity of 100 million tons were set to reopen from March as winter ends, Macquarie Group said in a February 22 report.

Chinese Production

Domestic mines will supply an extra 20 million tons in 2013, China’s National Development & Reform Commission said March 25.

While the planning agency didn’t specify whether the forecast was for ore of 62 percent content, it would be the most since 2010 at that grade. Goldman Sachs cut its 2013 price estimate to $139 from $144 on March 19, citing higher Chinese production.

The bank also anticipates a shift to surpluses from next year.

“I can understand why the market is saying that the iron ore price will be firm upfront and weaker at the back end of the year,” BHP Chief Executive Officer Marius Kloppers told analysts on a conference call February 20.

The opening of new mines will weigh on prices in the second half of the year, Greg Lilleyman, the head of Rio’s operations in Pilbara, Australia’s main ore-mining region, told a conference in Perth on March 19.

“It’s a double whammy,” said Daniel Hynes, the Sydney- based head of commodity strategy at CIMB Group, who has covered the market for about a decade.

“We expect weakening steel production growth out of China in combination with a pickup in exports, particularly from Australia.” - Bloomberg News