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Iron Ore Seen Dropping by BHP as Supply Growth Tops Demand

A worker holds up iron ore pellets for a photograph in Cilegon, Banten province, Indonesia. Photographer: Dadang Tri/Bloomberg
A worker holds up iron ore pellets for a photograph in Cilegon, Banten province, Indonesia. Photographer: Dadang Tri/Bloomberg

May 8 (Bloomberg) -- Global iron ore supplies will expand faster than demand over the long term, lowering prices and reducing volatility of the raw material used to make steel, according to BHP Billiton Ltd., the largest mining company.

New seaborne cargoes will replace more expensive output, mainly in China, Alan Chirgwin, general manager of iron ore marketing, told a conference in Singapore today. He didn’t give price forecasts or define long term. China is the world’s largest buyer of the biggest seaborne cargo after crude oil.

Iron ore has lost 10 percent this year, nearing bear-market territory, amid forecasts for an increase in global supplies just as demand growth in China drops. As producers boost output, higher-cost Chinese supply will drop and the price will extend declines, Deutsche Bank AG said in report last month. Rio Tinto Group is pressing ahead with its expansion, Alan Smith, president of iron ore Asia, said at the conference today.

“As the new supply gradually displaces high-cost production, it will therefore translate into lower prices,” BHP’s Chirgwin said. “Significant low-cost supply, mainly from Australia and Brazil, will eventually meet and exceed incremental Chinese demand.”

Imported ore with 62 percent content at the Chinese port of Tianjin was at $130 a dry metric ton yesterday, from $144.90 at the end of last year, according to data from The Steel Index Ltd. Prices have lost 18 percent since peaking at $158.90 on Feb. 20, nearing the 20 percent decline that some investors use to define a bear market. Brazil and Australia are the top ore suppliers.

Global Surplus

Global seaborne supply will climb 5.8 percent to 1.13 billion tons this year, followed by 16 percent growth in 2014 and 10 percent in 2015, according to Morgan Stanley. Total demand growth may drop from 6.7 percent in 2013 to 6.3 percent next year and 5.1 percent in 2015, the bank said in an April 23 report. The market will shift into surplus from 2015 after a run of deficits stretching back to at least 2005, it said.

“There’s no scarcity of high-quality resources: the issue that remains is the development,” said Chirgwin. “We start to see new, large seaborne supply coming to market mostly coming from large companies which have access to the resources and established infrastructure. Supply growth is, and will continue, accelerating.”

Undeveloped Projects

The 50 largest undeveloped projects could more than double global seaborne supply by adding 1.4 billion tons of production at a cost of $246 billion, Goldman Sachs Group Inc. said in a March 19 report. The list of projects is primarily comprised of those planned though not yet funded.

Rio Tinto, the second-biggest miner, will probably pursue a $5 billion expansion of its iron ore output in Australia, Chief Executive Officer Sam Walsh said this week, according to two people present at a meeting. David Luff, a spokesman for Rio, declined to comment on the expansion.

Rio Tinto is pressing ahead with its development in the Pilbara, said Smith, president of iron ore Asia, referring to Australia’s top producing region. The London-based company expects record sales of ore to China this year, he said.

“The past few days have been awash with news flow on major iron ore projects, with Rio Tinto reaffirming their preference to reach 360 million tons per annum in the Pilbara,” Macquarie Group Ltd. said in a report today that also listed planned expansions by Fortescue Metals Group and Brazil’s Vale SA. “However, there are always potential spanners in the works, whether that is future approvals for permits, balance-sheet concerns or another dramatic iron ore price cycle.”

Big Four

Vale, Rio, BHP and Fortescue are the four biggest suppliers, projected to account for 807 million tons of seaborne shipments this year, according to Morgan Stanley. That’s 72 percent of the forecast global total.

Iron ore imports by China climbed to 67.2 million tons in April, the highest level in four months, according to data from the General Administration of Customs today. Shipments were 64.6 million tons in March and 57.7 million tons in April last year, according to data compiled by Bloomberg. China’s steel output climbed 7.7 percent to a record 66.3 million tons in March, according to data from the National Bureau of Statistics.

China’s so-called resource intensity will drop as economic growth slows, BHP’s Chirgwin said. In future, China’s gross domestic product may expand at 7 percent to 8 percent a year, with steel demand growth at half that pace, compared with GDP growth of about 10 percent over the past decade, and steel demand growth of 1.5 times that figure, he said.

China’s days of double-digit economic growth are over, Zheng Yongnian, director of the East Asian Institute at the National University of Singapore, said at the conference. This is normal as no developing economy can sustain an extended high growth rate, he said.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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

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