Morgan Stanley Boosts Iron Ore Outlook as Deficit Persists

Morgan Stanley increased its iron ore forecasts for the first and second quarters of next year as global demand recovers and the seaborne market remains in deficit well into 2014.

The steelmaking ingredient will average $130 a metric ton in the first three months, $5 more than previously forecast, and $120 in the second quarter, up from $117, analysts Peter Richardson and Joel Crane wrote in a report. Ore will average $120 in 2014, an increase of 3 percent, the analysts wrote.

Iron ore entered a bull market in July as users in China replenished stockpiles that shrank in March to the lowest level since 2009. Australia’s Bureau of Resources and Energy Economics said last week that prices will average $119 in 2014 from $112 forecast in June as surging Chinese consumption absorbs gains in output that are seen pushing the global market into surplus. Morgan Stanley reiterated that its view was above consensus.

“Although we believe market concerns over price into 2014 are warranted, they are overly pessimistic,” the analysts wrote in the report dated yesterday. “Outside of China, steel output growth will see its best year since 2011, led by modest rebounds in production in India, East Asia and North America.”

The seaborne market will extend three years of deficit into the first half of 2014, before shifting to surplus, they wrote. The deficit is forecast to narrow from 71 million tons this half to 25 million tons between January and June next year and then swing to a surplus of 49 million tons in the second half of 2014.

Tianjin Prices

Iron ore with 62 percent content delivered to the Chinese port of Tianjin was at $131.40 a ton yesterday, according to The Steel Index Ltd. Prices have rallied 19 percent from this year’s low on May 31.

Ric Deverell, head of commodities at Credit Suisse Group AG, recommended shorting iron ore, or making bets on lower prices, at a conference in London today. Iron ore may drop in 2014 on rising output, Credit Suisse said in a report earlier this week.

Global supply is expected to grow faster than demand, reducing support for future price increases, according to Rio de Janeiro-based Vale SA, the biggest exporter. Vale expects to boost its output capacity 50 percent to 450 million tons by 2018, Jose Carlos Martins, head of ferrous & strategy, said yesterday.

Total seaborne supply will climb to 1.38 billion tons in 2014 from 1.18 billion tons this year, Morgan Stanley said. Supply from Australia, the world’s largest producer, is expected to jump 21 percent to 740 million tons next year as BHP Billiton Ltd., Rio Tinto Group and Fortescue Metals Group Ltd. deliver capacity increases, it said.

Steel Demand

World steel demand is forecast to rise 3.3 percent in 2014, after usage climbs 3.1 percent this year to 1.48 billion tons, the World Steel Association said yesterday. Demand in China, the largest user, is forecast to grow 6 percent in 2013 and 3 percent next year, according to the Brussels-based association.

Chinese steel mills are expected to increase their reliance on imported iron ore as local grades and production drop, the Canberra-based Bureau of Resources said in an Oct. 2 report. China will import 872 million tons next year, 8.3 percent more than previously forecast, and by 2018 shipments from overseas may increase to almost 1 billion tons, it said.

Demand for commodities will remain robust as China shifts to a consumption-led economy even as growth moderates, Mike Henry, president of BHP’s marketing and technology unit, said on Oct. 3. China may grow 7.5 percent in 2013, lower than an April forecast of 8.3 percent, the World Bank said yesterday.

Before it's here, it's on the Bloomberg Terminal.