Iron Ore Caps 2014 Loss as Morgan Stanley Says Worst Over

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Iron Ore Decline
A train loader fills train carriages with lump iron ore at Rio Tinto Group's West Angelas iron ore mine in Pilbara, Australia. The country this month cut its iron ore estimate for next year by 33 percent, forecasting that prices will average $63 a ton, according to the Department of Industry. Photographer: Ian Waldie/Bloomberg

Iron ore capped the biggest annual decline in at least five years as surging supplies from the world’s biggest producers outstrip demand growth in China, with the raw material dropping for every quarter in 2014.

Ore with 62 percent content delivered to Qingdao, China, lost 47 percent this year to $71.26 a dry metric ton, according to Metal Bulletin Ltd. The commodity fell to $66.84 on Dec. 23, the lowest level since June 2009, before rebounding with five daily gains to complete the longest run of advances since July. This month prices are just 0.1 percent lower.

“In terms of price downside, the worst is probably over,” Tom Price, an analyst at Morgan Stanley in London, said by e-mail. “The major factor that undercut ore prices in 2014 was the Australian-led supply surge.”

The steel-making ingredient entered a bear market in March as BHP Billiton Ltd. and Rio Tinto Group expanded low-cost supplies, betting that increased volumes would offset lower prices while forcing less-competitive mines to close. Concern that China is slowing, with the biggest buyer set for the weakest expansion in almost a quarter century, exacerbated the rout. The raw material may drop to less than $60 next year, according to Citigroup Inc. and Roubini Global Economics LLC.

The market shifted to a surplus in mid-2014 and that excess will widen to about 300 million tons by 2017, Goldman Sachs Group Inc. analysts Fawzi Hanano and Eugene King said in a Nov. 6 report. Producers led by BHP and Rio have embarked on $120 billion of spending on new mines since 2011, Goldman said.

Shares Drop

While the rout hurt producers’ shares this year, they’ve rebounded from their lows. Rio Tinto closed 0.8 percent higher at A$58 in Sydney, after bottoming at A$51.99 on Dec. 15. BHP was at A$29.37, up from the year’s low of A$27.29. Fortescue Metals Group Ltd. sank 53 percent in 2014.

Australia this month cut its iron ore estimate for next year by 33 percent, forecasting that prices will average $63 a ton, according to the Department of Industry. That compares with $94 a ton forecast in September by the Bureau of Resources and Energy Economics, which is now part of the department. The country is the world’s biggest shipper.

Iron ore’s 47 percent loss this year compares with the 16 percent retreat in the Bloomberg Commodity Index. While the gauge tracks 22 raw material including crude oil, gold and crops, it doesn’t include iron ore. The biggest decliner in the index is Brent crude, which dropped 49 percent in 2014.

The iron ore market has hit bottom and prices will rebound as China’s credit conditions improve, with the government loosening policy to spur growth, Standard Chartered Plc said in a November report. The bank recommended that investors bet on gains in the December, January and February swap contracts.

Interest Rates

The world’s second-largest economy, which purchases about 67 percent of seaborne ore, cut benchmark interest rates in November for the first time in more than two years. The central bank will broaden the definition of a deposit in 2015, boosting the lending capacity of Chinese banks.

This year’s “price fall reflects the competitive expansion in Australia, a shift that is sidelining high-cost producers,” Morgan Stanley said in a report on Dec. 16. The bank ranked iron ore as the least-preferred metal after gold on a 12-month view.

BHP, the world’s biggest mining company, has signaled there won’t be a slowdown. If the higher “volume doesn’t come from our business, it’s going to come from other businesses,” Jimmy Wilson, BHP’s president of iron ore, said in an interview broadcast by Australia’s Nine Network Nov. 30.

Prices will return to an average $85 to $90 next year as high-cost mines shut, Vale SA Chief Executive Officer Murilo Ferreira said last month. Australia’s Roy Hill Holdings Pty, developing a mine in the Australia’s ore-rich Pilbara, aims to be “one of the last people standing” as higher-cost suppliers close, Chief Executive Officer Barry Fitzgerald said last month.

The commodity will drop below $60 next year to accelerate closures of high-cost mines, Citigroup said Nov. 11. Chinese output will drop 15 percent this year to 339 million tons, and slide to 236 million in 2015, according to HSBC Holdings Plc.

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