Iron Ore Sinks Below $50 as Worldwide Glut Swells, China Slows

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Iron ore slumped below $50 a metric ton on prospects for a widening global glut as the largest producers boost supply and Chinese demand growth weakens. Rio Tinto Group, BHP Billiton Ltd. and Vale SA fell.

Ore with 62 percent content at Qingdao, China, retreated 3.5 percent to $49.53 a dry ton on Wednesday, according to Metal Bulletin Ltd. That’s the lowest level since 2004-2005, based on data from Metal Bulletin and annual benchmarks compiled by Clarkson Plc, the world’s largest shipbroker.

Prices collapsed last year and extended losses in 2015 as Rio Tinto and BHP Billiton boosted low-cost output into a saturated market, betting higher volumes would protect their market share and cut unit costs while less competitive miners faced closure. Global iron ore demand will shrink this year for the first time since 2009, Deutsche Bank AG said in a report on Tuesday, forecasting that prices may drop below $40 as weaker currencies and lower energy prices eased producers’ costs.

“Every quarter should see more supply than the quarter before, and that should continue for years,” Ivan Szpakowski, a Citigroup Inc. analyst in Hong Kong, said in an interview on Wednesday. “Every $10 is a psychological level but it doesn’t mean we can’t breach it,” said Szpakowski, who repeated a forecast on March 23 that the $50 level would be broken.

Not Viable

Tumbling prices risk mine closures and job losses at sites across the globe, including in China. With prices of about $60, the bulk of that country’s production isn’t economically viable, Standard Chartered Plc said in a March 9 report.

The seaborne surplus of the steel-making raw material will expand from 47 million tons this year to 260 million tons by 2018, according to Goldman Sachs Group Inc. The world’s biggest mining companies will add 310 million tons of supply through 2017, Deutsche Bank said in the March 31 report.

Stock in BHP, the world’s largest mining company, lost 0.2 percent to close at 1,470 pence in London, while Rio lost 0.4 percent to 2,762 pence. Vale declined 2.1 percent to $5.53 and Cliffs Natural Resources Inc. slid 3.1 percent to $4.66 in New York.

After Fortescue Chairman Andrew Forrest last month called on Australia’s largest suppliers to cap output to spur a rebound, the proposal was dismissed as “hare-brained” by Rio’s Chief Executive Officer Sam Walsh. Gina Rinehart, the billionaire developing the Roy Hill mine in Australia’s Pilbara region, affirmed plans for shipments to begin later this year.

Hurt Shareholders

Cutting supply to boost prices would hurt the company’s shareholders, Jimmy Wilson, head of BHP’s iron ore business, said on March 10. It’s rational for the top miners to increase output to protect and grow market share, according to Tom Albanese, former chief executive at Rio.

A property slump and slowing investment growth put China on course for the weakest full-year expansion since 1990 this year. A final Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics for March, released on Wednesday, was 49.6, showing a contraction. The official gauge was at 50.1 for the month. The country produces about half the world’s steel, buying ore from overseas to supplement local supplies.

As prices tumble, some higher-cost mines are closing or suspending output. More than 210 million tons of capacity has been cut, with additional closures to come, according to Morgan Stanley, which reduced its price forecasts last month.

Iron ore’s 30 percent drop this year eclipsed the 4.5 percent fall in the Bloomberg Commodity Index. The raw material will average $51 a ton this year, according to Deutsche Bank, while Westpac Banking Corp. forecasts $56.

“These crazy prices are below fundamentals,” said Philip Kirchlechner, former head of marketing at Fortescue and former chief iron ore representative at Rio in Shanghai. “What’s taken over the market is sentiment and feeling,” said Kirchlechner, director of Iron Ore Research Pty in Perth, Australia.

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