- CISA chief calls iron ore miners' profits unsustainable
- Market remains massively oversupplied, says CISA's Li
For any emerging bulls out there, China’s top steelmakers’ group has a sobering message: the global iron ore market is grossly oversupplied, demand in China is faltering and there’s a severe glut of steel.
“Don’t let wild, short-term price swings distract us from our analysis of the market,” Li Xinchuang, deputy secretary-general of the China Iron & Steel Association, said after iron ore surged on Monday by the most on record. “How can the rally possibly be sustained?”
Prices surged 19 percent on Monday as Chinese policy makers signaled they’re ready to bolster economic growth, boosting the outlook for steel and igniting speculation that some investors who’d bet against the market had been caught out. The steel association’s outlook for a reversal in prices chimes with a chorus of iron ore bears from Goldman Sachs Group Inc. to Citigroup Inc. that say the rally is unsustainable.
“The iron ore market remains massively oversupplied and steel consumption in China will extend declines this year,” Li said in an interview on Tuesday. On Wednesday, he told a conference in Perth that he sees iron ore prices trading between $40 and $60 a metric ton this year as China’s demand weakens.
Steel consumption in China, which shrank 5.4 percent last year, will contract by a further 3 percent this year, he said in the interview. Port inventories of iron ore have expanded 13 percent in the past year, according to Shanghai Steelhome Information Technology Co. The global seaborne glut is estimated at 45.8 million tons this year and 34.1 million tons in 2017, Morgan Stanley said in a report last month.
Surging Iron Ore
Iron ore’s 46 percent advance this year follows three straight annual losses through 2015, when BHP Billiton Ltd., Rio Tinto Group, Fortescue Metals Group Ltd. and Brazil’s Vale SA boosted low-cost output to defend market share amid a slowdown in China. Their strategy appears to be working as Rio’s managing director Michael Gollschewski told a conference on Tuesday its Pilbara mines generated earnings before interest, taxes and amortization of about 60 percent in 2015 and average of 65 percent in the last decade.
“How can such margins sustain in the long term?,” Li said on Tuesday. “You’ll never find margins like this in any other industry in the world.”
Vale, which this week signed an accord that could see it take a minority stake in Australian miner Fortescue, achieved a “staggering” 45 percent year-on-year reduction in delivered costs, Adrian Doyle, senior consultant of iron ore costs at CRU Group, said at the conference on Tuesday. Macroeconomic factors such as cheaper oil prices and lower shipping charges contributed to cost cutting at all the major miners, he said.
BHP has kept its margins above 50 percent even after iron ore prices sank, as it pared unit cash costs to $15.20 a ton in the first half of fiscal 2016, down 47 percent in about three years, its asset president for Western Australia iron ore Edgar Basto said Tuesday.
Prices were at $63.63 a dry ton on Tuesday after posting the biggest gain of 19 percent on Monday, according to Metal Bulletin Ltd. daily price data that goes back to 2009.
In 2016, prices have advanced as Chinese mills started to ramp up steel production after February’s Lunar New Year break, the government moved to boost the economy and iron ore supply tightened, according to Li, who is also the president of China Metallurgical Industry Planning and Research Institute. China buys more than two-thirds of seaborne ore and produces about half of global steel output.
Steel demand will keep declining in 2016 and beyond as the world’s second-largest economy seeks to transition from growth led by investment and manufacturing to consumption and services, Li said on Wednesday. The country’s consumption of the alloy may drop to 552 million tons by 2025 and 492 million by 2030, he forecasts.
Steel reinforcement bar in China, a benchmark product used in construction, has fallen 23 percent in the past two years as domestic demand fell for the first time in a generation. CISA members made a net loss of 64.5 billion yuan ($9.9 billion) last year, the group said in January. CISA represents some of the country’s biggest mills including Hebei Iron & Steel Group Co. and Baoshan Iron & Steel Co.