Citigroup Says Iron Ore Rally to Fade as Oversupply Kicks In

  • Seaborne glut expected to double to 38 million tons next year
  • Prices may decline in the second half as steel retreats

The global iron ore market faces increasingly severe oversupply, according to Citigroup Inc., which said the commodity’s gains will probably be reversed in the second half.

Gains in production, including from miners that restarted output after this year’s rally, coupled with likely losses in steel prices, will combine to hurt iron ore, the bank said in a quarterly commodities report received Monday. While iron ore’s price declines may have been delayed, they’re still coming, analysts led by Ed Morse wrote.

Iron ore surged 23 percent in the first quarter as Chinese mills ramped up output to take advantage of a rebound in steel prices, and some supply was disrupted in Australia. Citigroup said that both of those supportive factors were likely to reverse, hurting the outlook for the market. Last week, Rio Tinto Group Chief Executive Officer Sam Walsh said that iron ore may fall in the second half as new production offsets improving demand in China.

“Prices may remain high in the second quarter before the rally fades,” Citigroup said. “Weaker-than-expected Australian exports and more resilient Chinese steel production have kept prices elevated. However, both trends are likely to reverse in the medium and long term.”

Price Forecasts

Ore with 62 percent content delivered to Qingdao has risen 39 percent this year to $60.36 a dry metric ton, averaging $50, according to Metal Bulletin Ltd. Iron ore may average $45 a ton in 2016, $39 next year and $38 in 2018, according to Citigroup, which raised its prior forecasts from $39 for this year, and $35 for both 2017 and 2018.

This year’s surprise recovery contrasts with three straight years of losses through 2015 that were driven by rising low-cost supply from the biggest miners including Vale SA in Brazil and BHP Billiton Ltd. and Rio Tinto Group in Australia, which helped to spur a surplus. Citigroup estimated that the global glut will more than double to 38 million tons in 2017, before dipping to 14 million tons in 2018 and rebounding to 44 million tons in 2019.

China pushed steel output to a record 70.65 million tons in March, according to data last week, as mills fired up plants to take advantage of a price surge that’s rescued profit margins. Still, in the first quarter supply fell 3.2 percent. The country makes half of the world’s steel.

Least Likely

Iron ore is one of the outliers in Citigroup’s view on raw materials as a whole, with the bank saying most prices in the sector have probably bottomed. While Citigroup said it saw growing evidence that virtually all commodities have reached their lows, bulks including iron ore are the least likely to show significant recovery in the medium term.

Iron ore output is returning after the rally, with supply from India showing a pickup, Macquarie Group Ltd. said this month. Cargoes from Australia may rise 10 percent to 846 million tons this year as billionaire Gina Rinehart’s Roy Hill venture ramps up, the Department of Industry, Innovation & Science estimates.

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