Goldman Warns on Swelling Iron Ore Surplus as Miners Add Supply

Updated on
  • New mining capacity will be added in second half, bank says
  • China’s steel production poised to slow, Lelong, Cai write

Goldman Sachs Group Inc. warned that the global iron ore market faces a rising surplus as miners are poised to churn out more supply while China’s production of steel slows, predicting that prices will probably sink below $40 a metric ton as stockpiles expand.

“We expect a growing surplus of seaborne supply to drive an increase in port inventories,” analysts Christian Lelong and Amber Cai wrote in a note received Friday. “Stocks are set to increase as new mining capacity ramps up in the second half of 2016 and Chinese demand declines.”

Benchmark prices sank back below $50 on Thursday to the lowest level since February on concern that profit margins at China’s steel mills are again collapsing, hurting the outlook for iron ore demand just as miners continue to add supply. Between February and April, iron ore had benefited as an upswing in credit in China lifted steel prices, spurring a revival of production at mills. A speculative frenzy by local investors added to the gains, prompting a clampdown from regulators and exchanges.

In China, “the brief improvement in profitability caused too many blast furnaces to be reheated,” according to the analysts, who said there’s now excess steel supply. Steel production will probably follow a downward path for the rest of the year, in line with historical trends, they said in the May 26 note.

Price Outlook

Goldman said it saw iron ore at $55 a ton this quarter and $45 a ton between July and September, repeating forecasts the New York-based bank gave in a report earlier this month. For the final three months, Goldman said iron ore is now seen at $38 a ton, $2 less than the figure given in the earlier report.

Ore with 62 percent content rose 3.4 percent to $51.15 a ton on Friday, according to Metal Bulletin Ltd. The raw material has still lost 27 percent since peaking at more than $70 on April 21, when the speculative frenzy in China helped to lift prices for three straight months. Earlier on Friday, futures in Dalian and Singapore climbed, paring weekly losses.

There are signs of increased supply. China’s port inventories rose 0.2 percent to 100.65 million tons this week to reach the highest level since December 2014, according to Shanghai Steelhome Information Technology Co. Overseas producers are forecast to dispatch more shipments to China this quarter and next, according to Huatai Futures Co.

Iron ore “oversupply should extend into the rest of 2016 thanks to planned capacity additions,” Citigroup Inc. said in a note earlier this week, citing the four largest shippers -- Rio Tinto Group, BHP Billiton Ltd., Vale SA and Fortescue Metals Group Ltd. -- as well as the Pilbara venture backed by billionaire Gina Rinehart. “We remain bearish on iron ore,” Citigroup said.

— With assistance by Jake Lloyd-Smith

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