Surging supplies of seaborne iron ore will trigger the closure of high-cost output in China, according to Michael Zhu, former global sales director at Vale SA, the world’s largest producer of the steel-making raw material.
“The first players to be out of the market will be the domestic producers who have higher costs,” said Zhu, president of Hong Kong-based trader Millennia Resources Ltd. Mainland mines will have to reduce output or shut if prices remain below $100 for another month or two, he said in an interview, forecasting prices may drop as low as $80 a ton this year.
Producers in China, the largest user, face a rising challenge of lower-cost supplies from Australia and Brazil that are spurring a global glut and hurting prices. Iron ore entered a bear market in March and fell below $100 a ton last month for the first time since 2012. Goldman Sachs Group Inc. and Australia and New Zealand Banking Group Ltd. both forecast this week a shakeout of Chinese mines as the surplus expands.
“It will take two or three months to see the results” of the lower prices on Chinese suppliers, said Zhu, 50, who’s been in the industry for about three decades and started Millennia in September 2013. “They cannot shut down immediately after they lose money.”
Ore with 62 percent content delivered to Tianjin has lost 30 percent this year to $94.30 a ton, according to data compiled by The Steel Index Ltd. The price, which could touch $80 in the second half as exports from Australia and Brazil increase, may average at $100 to $110 in 2014, Zhu said. Last year’s average was about $135, and it’s about $115 so far this year. The benchmark hasn’t traded below $80 since 2009.
Imports by China will rise 6.3 percent to 872 million tons this year and jump to 916 million in 2015, Australia’s Bureau of Resources and Energy Economics said in a quarterly report in March. Australia’s Port Hedland, the largest bulk-export terminal, reported yesterday shipments to China grew 36 percent to 130.5 million tons in the first five months of 2014.
“We do expect the iron ore market to shift from a significant deficit in 2013 to a surplus in 2015 and 2016,” Societe Generale SA said in a report e-mailed yesterday. “However, the world will still need more than 200 million tons of high-cost Chinese iron ore mines, which are not viable below a price of $120 a ton. As a result, we expect iron ore prices to stay above $100 a ton for the foreseeable future.”
The displacement of so-called marginal Chinese supply has begun as prices retreat, Goldman Sachs said in a June 3 report, forecasting the biggest closures in Hebei as that province is the mainland’s largest producer and has some of the highest costs. The bank predicts the global seaborne surplus will jump to 72 million tons this year from 14 million tons in 2013.
Australian exports are increasing faster than expected, which could trigger the permanent closure of high-cost Chinese supply, ANZ said in a report yesterday. As much as 100 million tons could close this year, it forecast, while cutting its iron average ore price forecasts for 2014 to 2016.
“If they shut down 100 million tons, for example, where will this 100 million tons come from?” said Zhu, who left the world’s biggest exporter in 2012 after about 12 years at the Rio de Janeiro-based company. “Imported iron ore will replace this domestic ore, so imports will be even bigger,” he said by phone on June 3.
Local ore in China costs about $75 to $145 a ton to produce, more than twice as expensive as overseas supplies, the National Development & Reform Commission said in a report on May 28. Sam Walsh, chief executive officer of Rio Tinto Group, told Bloomberg on June 3 that the biggest producer after Vale was the world’s lowest cost supplier “with costs of $20 per ton.”
China’s seaborne demand will rise 4.4 percent this year from 2013, while local supplies of 62 percent content equivalent ore drop 8.8 percent, according to Morgan Stanley. About 291 million tons of Chinese output will be needed to balance the market this year and 222 million next year, Societe Generale said in the report, forecasting $115 a ton this year.
Millennia counts Vale as among its suppliers of ore, according to Zhu, who said that he maintains close ties with the company. “We still have good relations and we work together,” he said.