Iron ore is extending a bull market on record sales to China that are spurring forecasters from Morgan Stanley to the World Bank to increase price predictions.
Shipments from Australia’s Port Hedland, the biggest iron-ore export terminal, to China jumped 43 percent to a record last month, port data show. The Asian nation already imported the most ore ever in September, according to customs data. Standard Bank Group Ltd. and the Bureau of Resources and Energy Economics, Australia’s state forecaster, also increased price estimates in the past several weeks.
Prices reached a two-month high in China last week after data showed Asia’s largest economy accelerated. While supply expansions led by Australian producers will push the seaborne market into surplus next year for the first time since 2010, it won’t happen until the second half, said Joel Crane, an analyst at Morgan Stanley. Iron ore is the biggest source of revenue for Rio Tinto Group, BHP Billiton Ltd. and Vale SA and the largest seaborne commodity cargo after crude oil.
“It’s coming, just not yet,” said Melbourne-based Crane. “There’s more demand than supply and there will continue to be more demand than supply into next year. Then, as Rio and BHP ramp up and Vale gets its first net expansion in a year, then you should start to see supply growth maintain the pace of demand growth.”
Ore at China’s Tianjin port reached $137.10 a metric ton on Nov. 6, the most since Sept. 5, after rallying from a seven-month low in May. The commodity used to make steel entered a bull market in July as China’s economy snapped a two-quarter slowdown, paring the ore’s drop this year to 6.2 percent. The Standard & Poor’s GSCI gauge of 24 raw materials, which doesn’t include iron ore, declined 5.8 percent.
Supply in the seaborne market will fall 25 million tons short of demand in the first half of 2014, before a 49 million-ton surplus emerges in the final six months, Morgan Stanley estimates. Prices will average $130 in the first quarter and $120 in the second, from earlier estimates of $125 and $117, the bank said in a report last month.
Trade in iron ore will expand 7.1 percent to a record 1.27 billion tons next year, according to Clarkson Plc, the world’s biggest shipbroker. China’s imports will advance 9.5 percent to 865 million tons, the fastest growth in three years, the London-based company estimates.
China’s economy expanded more than fivefold in the past decade, adding almost $7 trillion to gross domestic product. While the expansion may slow to 7.4 percent in 2014 from 7.6 percent this year, that’s almost three times the expected pace of U.S. growth, economist forecasts compiled by Bloomberg show.
Goldman Sachs Group Inc. expects the global glut to emerge in the second quarter and reiterated last month its forecast for a 2014 average of $108, or 21 percent less than now. HSBC Holdings Plc predicts an average of $115 in 2014 and Ric Deverell, the head of commodities research at Credit Suisse Group AG, told a conference in London on Oct. 8 that he recommended betting on a decline.
Prices may average $115 next year, the least since 2009, according to the median of 11 analyst estimates compiled by Bloomberg. Surging output in Australia, the biggest exporter, will swell the global surplus to 154 million tons, from 24 million tons in 2013, according to UBS AG. HSBC forecasts a glut of 45 million tons and Deutsche Bank AG 75 million tons.
China imported 67.83 million tons of ore in October, customs data show. While that’s less than the all-time high of 74.58 million tons reached in September, it was 20 percent more than a year earlier. Shipments this month and next are likely to be “very high,” Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, wrote in a report Nov. 8.
Rio, based in London, plans to expand output in Australia’s Pilbara region to 360 million tons from 290 million tons. Fortescue Metals Group Ltd., based in Perth, is tripling its capacity in the Pilbara to 155 million tons. The first ore from Melbourne-based BHP’s Jimblebar expansion in Western Australia arrived six months early.
Australian shipments may rise 17 percent to a record 669 million tons next year, the Canberra-based Bureau of Resources and Energy Economics says.
“At least in Australia, things are going according to expectations, if not a bit better,” said Christian Lelong, an analyst at Goldman Sachs in Sydney. “The oversupply should start to become evident from the second quarter onwards. We expect the structural decline in prices to start next year but to really get going from the second quarter.”
Vale, the largest producer, said last month it’s getting ready to start the $3.5 billion Carajas expansion project, adding 40 million tons of capacity. The Rio de Janeiro-based company plans to increase overall production capacity by 50 percent to 450 million tons by 2018.
Chinese buyers will take greater control of pricing over the next two years as global supply increases, according to former Noble Group Ltd. Vice Chairman Harry Banga, who’s traded the ore for almost 20 years. Prices will decline to $95 to $110 a ton, said Banga, who in May started The Caravel Group Ltd., which aims to trade 15 million tons in its first year.
Any slump in prices may spur higher-cost Chinese mines to reduce supply, curbing the decline, said Justin Smirk, a senior economist at Westpac Banking Corp. in Sydney and the second-most-accurate industrial metals forecaster tracked by Bloomberg over the past eight quarters. More than half of Chinese output costs $95 to $100 a ton to produce, Deutsche Bank estimates.
Stockpiles in China were 74.4 million tons on Nov. 8, from 85.1 million tons a year earlier, according to Beijing Antaike Development Co., a state-backed research company. Steel futures in Shanghai advanced 8.5 percent from a nine-month low in June.
Steel production in China rose 13 percent in September from a year earlier, the Brussels-based World Steel Association says. Global demand for the alloy will probably expand 3.3 percent to 1.523 billion tons in 2014, from 3.1 percent this year, the association forecast last month.
Australia’s Bureau of Resources raised its 2014 price forecast to $119 last month, up from $112 in June, citing Chinese demand. The Washington-based World Bank said in a report last month that ore will average $135 next year, up from a July prediction of $125. Standard Bank expects prices to average $122 next year, 14 percent more than previously forecast.
Australian shipments of iron ore and associated products were valued at $56.7 billion last year, more than twice as much as in 2009 and 22 percent of total goods exported, according to ITC TradeMap, a venture between the World Trade Organization and the United Nations. Brazilian cargoes were valued at $31 billion, or 13 percent of the country’s total, the data show.
“This wall of iron ore may not produce the collapse in prices that people expect,” said Westpac’s Smirk. “The combination of cheap ore on the global market, continuing growth in supply and the more recent lift in Chinese ore supply is about to create a correction. But when prices fall, the Chinese miners who are marginal will respond and cut production.”