The iron ore rout isn’t done yet and the raw material will extend declines into the $30s a metric ton this year, according to Andy Xie, an independent economist who predicted a collapse in prices in February.
Steel demand in China is shrinking while iron ore supplies are still rising, Xie, a former Asia-Pacific chief economist at Morgan Stanley, said in an interview from Hong Kong on Wednesday after benchmark prices plunged a record 10 percent. Iron ore rebounded 9.9 percent on Thursday. The slump in China’s stock markets, which showed a speculative bubble was bursting, had accelerated declines, according to Xie.
Iron ore sank for 10 days though Wednesday to the lowest since at least 2009 on concern low-cost output from Rio Tinto Group, BHP Billiton Ltd. and Vale SA is rising while demand sputters in China, the world’s largest user. The slump was exacerbated by an equity rout in China, which prompted investors to shun risky assets, including most commodities. China’s stock markets climbed on Thursday and producers’ shares rose.
“Just look at Australia, new projects are coming up, look at all the stuff out there,” Xie said by phone. “For BHP, Rio and Vale, they will not cut production because it doesn’t make sense. Why’d you want to cut production and let the high-cost producers come online?”
Ore with 62 percent content delivered to Qingdao reached $44.59 a dry ton on Wednesday, according to Metal Bulletin Ltd. That’s the lowest price on record dating to May 2009, the data show. Until the past several years, the raw material was traded predominantly through annual benchmark prices and compared with those, the price would be the lowest since 2005, data compiled by Clarkson Plc show. It jumped the most since at least 2009 to $48.99 on Thursday.
In February, Xie said iron ore will slump below $40 a ton, citing expanding low-cost supply and shrinking steel demand, and he maintained that outlook on Wednesday. Xie, who also worked at the World Bank, has tracked China for more than two decades.
His outlook for rising supply is borne out by projections from Australia. Shipments from the top exporter will expand 10 percent next year, more than twice the pace forecast for 2015, the government said June 30, citing output from billionaire Gina Rinehart’s new mine and growth by producers including Rio.
Rio rose 1.9 percent to 2,532.50 pence by 12:40 p.m. in London, rebounding from the lowest since 2009. BHP was 2.1 percent higher in London, while Fortescue Metals Group Ltd. rallied 6.6 percent to A$1.785 in Australian trading. The companies are Australia’s top three exporters.
“In the long run, we need only big, low-cost producers,” Xie said. “All these marginal producers that came up because of high prices, they need to vanish.”