Iron Ore Seen Below $40 by Citi as Roy Hill `Whale' Starts

  • Lower prices forecast as steel mills in China cut production
  • Roy Hill's ramp-up expected to have a `large price impact'

New supply from Gina Rinehart’s Roy Hill iron ore mine will contribute to a slump below $40 a metric ton next year, according to Citigroup Inc., which said lower steel output in China would also hurt the commodity.

The project in Australia’s ore-rich Pilbara is poised to start shipments in October, and its expansion toward annual output of 55 million tons will probably have a large impact on prices, analysts including Ivan Szpakowski said in a report. Surging production will combine with steel-output cuts in China to push prices below $40 in the first half, Citigroup said.

Iron ore’s retreated 20 percent this year on rising low-cost output and faltering demand growth in China, and the addition of the new cargoes from Roy Hill to the global seaborne market may add to oversupply. Roy Hill Holdings Pty Ltd. Chief Executive Officer Barry Fitzgerald told reporters in China last week the project is on target to achieve full capacity over 15 months. Citigroup described the new mine in the report on Monday as an “impending whale” that would ship almost all of its output to China.

“A more significant shakeout is likely in the first half of 2016 as Chinese mills reduce output while supply continues to build,” said Szpakowski, who has forecast a drop to below $40 a ton since at least July. “The largest source of incremental supply is coming from Roy Hill.”

Larger Impact

Output from Roy Hill will probably have a larger impact on benchmarks than new Brazilian supply as its ore will be similar to Rio Tinto Group’s Pilbara Blend fines, closely matching the main index terms, according to Szpakowski.

The raw material with 62 percent content delivered to Qingdao fell 0.2 percent to $56.86 a dry ton on Monday, according to Metal Bulletin Ltd. It sank to $44.59 on July 8, a record low for daily price data dating back to May 2009.

While steel output in China was expected to hold steady over the next two months even as many mills registered losses, a significant decline was expected in the first quarter of next year, Citigroup said. The country accounts for about 50 percent of global production.

After decades of rapid growth and an unprecedented expansion in steel production, Asia’s top economy is now grappling with excess capacity as a property-led slowdown crimps demand. Data on Monday showed profits at Chinese industrial companies tumbling the most in at least four years.

Losing Money

"Chinese steel mills face some of their worst conditions ever, and the vast majority are currently losing money," Citigroup said. “The news is bleak outside China as well,” it said, citing a 2.6 percent year-to-date decline in global production outside the top maker.

Citigroup forecast earlier this year that iron ore would drop to less than $40 in the final three months of 2015 as supply rose and Roy Hill began shipments. In contrast to expectations for a steady rise in Australian exports, volumes have been volatile this year, Szpakowski wrote on Monday, predicting that prices would drop to about $50 over the next two months.

Billionaire Rinehart, whose father discovered the iron ore deposits that today supply Asia’s steel industry, said in April that while prices had sunk more than expected amid the global glut, they wouldn’t be down forever.

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