Citigroup Says Iron Ore Risks Tumbling Into $20s on Demand

  • Bank cuts forecasts for three years to 2018 amid global glut
  • Medium-term outlook seen in range of $28 to $45 as costs shift

After oil sank into the $20s this week, will iron ore follow suit?

“There’s a strong possibility that iron ore falls below $30 in 2016,” Citigroup Inc. Head of Asia Commodity Research Ivan Szpakowski said in an interview on Thursday after the bank cut price forecasts through to 2018 in a report. In the first half, “the biggest pressure is actually from the demand side. It’s actually going to come from weak steel demand in China,” said Szpakowski.

The raw material is seen at $36 this year, 12 percent lower than previously forecast, and $35 in 2017 and 2018, down from $39 and $40, analysts including Szpakowski wrote in the Jan. 14 report. The base-case forecast over a three-year horizon was cut to $35 from $40, while the bear-case was put at $28.

Iron ore has been routed as the world’s largest miners including Rio Tinto Group and BHP Billiton Ltd. in Australia and Brazil’s Vale SA expanded low-cost output while demand growth stalled in China. Lower costs including freight and energy and weakening currencies in producer nations are enabling suppliers to reduce their break-even rates and withstand lower prices. Costs had fallen more than expected, the bank said.

‘Evolution of Costs’

“Given the market’s need for further curtailments, we see the evolution of costs as one of the two most important factors for the iron ore market, alongside Chinese policy decisions affecting steel demand,” the bank said in the report. “We see challenges for iron ore ahead.”

Ore with 62 percent content delivered to Qingdao rose 1.8 percent to $40.22 a dry ton on Thursday after slumping 4.1 percent to $39.51 a day earlier, according to Metal Bulletin Ltd. The steel-making commodity bottomed at $38.30 on Dec. 11, a record in daily prices dating back to May 2009.

Steel output in China will probably shrink 2.6 percent this year as local consumption weakens and mills encounter stiffer opposition to exports, Szpakowski estimated. Supply fell 2.2 percent to 738.38 million tons in the first 11 months of last year, according to official data. China, which makes about half the world’s steel, is set to report full-year output on Jan. 19.

“Under our bear case, we believe medium-term prices would need to fall to around $28 a ton, primarily due to assumptions of weaker oil and export-country currencies,” Citigroup said in the report, with the bull case for iron ore at $45. “These mid-term forecasts represent average levels, with prices expected to fluctuate below and above these levels.”

Rio shares fell 1.8 percent to A$38.85 in Sydney, the lowest close since 2009, as BHP climbed 0.7 percent to snap three days of losses. In Brazil, biggest supplier Vale has sunk 31 percent this year after a 47 percent loss in 2015.

Capital Economics Ltd. raised the possibility of sub-$30 iron ore this year in a forecast made at the end of 2015, saying that the commodity may slump into the $20s in the first half as supplies rise, followed by a rally.