- Morgan Stanley says seaborne supply will climb 1.8% this year
- Prices below $45 seen piling pressure on smaller producers
Iron ore capacity cuts driven by slumping prices have yet to swing the global market to a deficit as the world’s biggest producers keep on adding supply, according to Morgan Stanley, which projects that a glut will endure to at least 2020.
An estimated 91 million metric tons of high-cost capacity has been cut last year and so far in 2016, the bank said in a report. When combined with reductions not spurred by low-prices -- such as the suspension of Samarco Mineracao SA’s operations in Brazil after a dam burst -- tonnage removed climbs to 141 million tons, or 10 percent of seaborne supply, the bank said.
“However, this continues to be offset by expanded output from the majors,” the bank said, citing supplies from Rio Tinto Group and BHP Billiton Ltd. in Australia. The increases will ensure that seaborne output still grows in 2016, rising by about 1.8 percent, to keep the market oversupplied, the bank said.
Iron ore prices have tumbled as steel production and demand in China started to contract after years of growth, and the biggest producers such as Rio, BHP and Brazil’s Vale SA boosted low-cost output to defend market share. The World Bank has forecast that iron ore may post the biggest loss among metals this year as supply continues to outstrip consumption. Rio will update investors on its performance and strategy on Thursday when it’s set to report earnings.
Ore with 62 percent content delivered to Qingdao was at $45.73 a dry ton on Wednesday, according to Metal Bulletin Ltd. While that’s the highest level since mid-November, prices are 27 percent lower than a year ago. Iron ore has remained at or below about $45 a ton year-to-date, piling pressure on high-cost producers, according to Morgan Stanley.
“If iron ore stays around current levels or lower, we will see further production cuts from high-end producers,” said Ric Spooner, chief market analyst at CMC Markets in Sydney. “We may see production cuts both in China and the seaborne market,” he said, citing the possibility Vale may reduce some high-cost supply even as its new low-cost projects continue to develop.
Vale has said that it expects its S11D project -- which will add 90 million tons annually -- to commence in the second half. Separately, the Rio de Janeiro-based company, together with BHP, own Samarco, which suspended output after the deadly accident in November.
The global seaborne glut is estimated at 45.8 million tons this year, 34.1 million tons in 2017 and 68.2 million tons in 2018, the bank said in the report. Morgan Stanley forecasts that prices will average $46 a ton this year, $45 a ton next year and $48 a ton in 2018.
Among cuts this year, Kumba Iron Ore Ltd. said it will reduce output at Africa’s largest mine as it doesn’t foresee prices recovering. The Pretoria-based unit of Anglo American Plc pared its forecast for output from Sishen, its biggest mine, to about 27 million tons. The pit produced 31.4 million tons in 2015.
Adding to supplies this year will be cargoes from Roy Hill Holdings Pty’s 55 million ton project in Australia’s Pilbara. The company controlled by billionaire Gina Rinehart said on Wednesday that it’s starting to ramp up production toward that total, with a third shipment set to be loaded.