Iron Ore Seen Supported by Morgan Stanley as Citi Is Bearish

Iron ore will be supported through the final quarter and into the first half of next year as a global surplus emerges only later in 2014, Morgan Stanley said in a forecast that contrasts with Citigroup Inc. (C)’s outlook.

Prices may average $125 a metric ton in the final three months of 2013 and $120 in the first quarter, Morgan Stanley analysts Joel Crane and Peter Richardson said in a report today. The steelmaking raw material will average $117 in 2014 and $114 in 2015, they said, describing the base-case price forecasts as above consensus.

The largest commodity cargo after oil entered a bull market in July as users in China replenished stockpiles that shrank in March to the lowest level since 2009. Citigroup said this week that it’s bearish in the short term, forecasting prices at $115 in three months on an expected surge in seaborne supply. BHP Billiton Ltd. (BHP), the world’s biggest mining company, said today that rising supplies will weigh on commodity prices.

“We forecast the market to remain undersupplied the first half of 2014 before shifting toward a modest oversupply in the second half,” Richardson and Crane said. “Until that imbalance arrives, the underlying commodity price will continue to carry a premium to reflect supply tightness.”

Iron ore with 62 percent content delivered to the Chinese port of Tianjin rose 0.8 percent to $133.80 a dry ton today, according to The Steel Index Ltd. Prices have rallied 21 percent from this year’s low on May 31 and averaged $132.48 since July 1.

Capacity Expansions

The global seaborne market is seen shifting to a surplus next year as producers from BHP and Rio Tinto Group (RIO) to Vale SA deliver capacity expansions to meet Chinese demand. The surplus will reach 82 million tons in 2014 and expand through 2017, Goldman Sachs Group Inc. said in July.

“The iron ore market has been far more robust for longer than we, and we suspect many others in the market, had expected,” Deutsche Bank AG analysts including Michael Lewis wrote in a report today, raising the fourth-quarter forecast 4.2 percent to $125. The outlook for next year was cut 4.3 percent to $110 as the market shifts to surplus, Deutsche Bank said.

Morgan Stanley forecast a deficit of 72 million tons this half, narrowing to 26 million tons in the first six months of next year and moving to 48 million ton surplus in the second half, according to the report. The increase in global supply will be driven by bigger mines in Australia, with Rio set to overtake Vale as the world’s top shipper, it said.

More Cargoes

Citigroup said it’s bearish over three months as Rio, BHP and Perth-based Fortescue Metals Group Ltd. (FMG) boost exports in the final quarter, while the resolution of logistical blockages in Brazil allows more cargoes. At the same time, import demand may soften, Citigroup said in reports on Sept. 23 and yesterday.

Increased supply has “exerted downward pressure on many commodity markets more recently and we expect this trend to continue over the short term,” BHP Chairman Jac Nasser said in the Melbourne-based company’s annual report today.

Rio expanded its Australian operations to 290 million tons of annual capacity, and is studying a further increase to 360 million tons. Fortescue Metals says it’s on track to boost capacity to 155 million tons by the end of the year.

Stockpiles in China came to 69.8 million tons in the week to Sept. 20, down from a seven-month high in the period ended Aug. 30, according to Beijing Antaike Information Development. Inventories are still 26 percent below a year earlier.

Iron ore can be measured in dry tons, or metric tons less moisture. At Tianjin port, moisture can account for 8 percent to 10 percent of the weight.

To contact the reporter on this story: Phoebe Sedgman in Wellington at psedgman2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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