Australia, the world’s largest iron ore exporter, cut its price estimates for this year and 2015, predicting that surging output will boost competition among low-cost shippers and spur the closure of suppliers in China.
The raw material will average about $105 a ton this year from $110 forecast in March, the Canberra-based Bureau of Resources and Energy Economics said today. Prices may average about $97 a ton in 2015 from $103 estimated in March, it said.
Producers including BHP Billiton Ltd. (BHP) and Fortescue Metals Group Ltd. are expanding supplies in Australia, betting that increased volumes from their low-cost mines will more than offset declining prices. Iron ore entered into a bear market in March and fell to the lowest since 2012 this month. The commodity faces a global surplus until at least 2016 that will pressure prices, according to Credit Suisse Group AG.
“Lower iron ore prices are unlikely to affect the production rates of most iron ore mines in the Pilbara, which have some of the lowest production costs in the world,” the bureau said, referring to the main mining region in Australia. “At current prices a large proportion of China’s domestic production is still assessed as loss-making.”
Shipments from Australia will jump 17 percent to a record 680 million tons this year and climb to 764 million tons next year, the bureau said. Previously, the bureau estimated exports in 2014 at 687 million tons. The agency’s price forecasts refer to spot ore with 62 percent content free-on-board Australia.
Iron ore with 62 percent content delivered to Tianjin port rose 0.4 percent to $93.70 a dry ton today, according to The Steel Index Ltd. Prices slumped 30 percent this year, dropping to $89 on June 16, the lowest since September 2012.
Should the same reforms in China that have pushed unprofitable steel mills to close are also applied to iron ore miners, it is likely that a number will close before the end of 2014, the bureau said. While this loss in supply should support prices later this year, it is unlikely to fully offset the substantial increase from Australia, it said.
China’s imports may rise 6 percent to 869 million tons this year and increase to 927 million tons next year, the bureau estimated. Previously it had forecast purchases of 872 million tons this year and 916 million tons in 2015.
Iron ore may be supported as higher-cost Chinese mines close amid the slump in prices. The commodity may find a so-called floor at $90 a ton, a level that may put more than a quarter of Chinese capacity out of business and spur production cuts at mines outside the country, according to Citigroup Inc.
China’s domestic ore costs about $75 to $145 a ton to produce, the National Development & Reform Commission said in May. That compares with a break-even price of $44 for Rio Tinto Group, $53 for BHP, $68 for Vale SA (VALE5) and $77 for Fortescue, according to UBS AG estimates.
Fortescue slumped as much as 2.8 percent to A$4.24 in Sydney before closing unchanged at A$4.36. Rio Tinto declined 1.7 percent to 3,044 pence in London trading, while BHP fell 1.3 percent to 1,896.50 pence.
Iron ore is expected to average $100 a ton this year, dropping to $89 in 2015 and $87 in 2016, Credit Suisse said in a report on June 23. Global supply will outstrip demand by 31 million tons this year and 59 million tons in 2015, it said. Goldman Sachs Group Inc. said last month the seaborne surplus may be 72 million tons this year and 175 million tons in 2015.
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