Iron Ore Price Forecast Cut by Morgan Stanley on Supply

Morgan Stanley reduced its iron ore price estimate for this year and predicted a further drop in 2015 as the seaborne surplus grew faster than expected and the level of cost support at Chinese producers declined. The rate slumped to the lowest since September 2012 today.

Prices will average $105 a ton this year from $118 forecast in May and $135 in 2013, analysts Joel Crane and Rachel Zhang wrote in a report today. Prices may average about $90 a ton in 2015, a drop of 21 percent from an earlier estimate, they wrote.

Morgan Stanley’s forecast for this year is lower than that of Goldman Sachs Group Inc., which predicts an average of $109, and below UBS AG’s estimate of $111. Iron ore, a raw material used to make steel, fell below $100 last month for the first time since 2012 as mining companies from BHP Billiton Ltd. to Rio Tinto Group in Australia boosted output, betting that rising exports to China would more than offset lower prices.

“As seaborne supply enters a period of vast expansion, cheaper tons will displace higher cost tons in China and elsewhere,” Crane and Zhang wrote. “The entire cost curve will shift lower and levels of cost support will follow. We believe this will simultaneously pressure prices lower.”

Ore with 62 percent iron content delivered to Tianjin plunged 32 percent this year to $91.50 a dry ton, data compiled by The Steel Index Ltd. show. Prices could average $95 in the second half and trade from $80 to $110, Morgan Stanley said. Futures for July settlement on the Singapore Exchange fell 1.3 percent to $91.51 by 1:30 p.m. local time today.

Market Surplus

Declining seaborne prices will prompt higher-cost capacity to close and be replaced by cheaper imports, the bank said. This causes the seaborne market to rebalance as supplies get absorbed, and reduces the level of marginal cost support in China to about $100 from $120, it said. Chinese mines with operating costs above this level would be forced to close.

Goldman Sachs expects the worldwide seaborne surplus will increase to 72 million tons this year and to 175 million tons in 2015 from last year’s 14 million tons. UBS sees a glut of 74 million tons in 2014 and 177 million tons next year.

“You’ve clearly got surpluses, there’s no doubt about that,” Andrew Shaw, an analyst at Credit Suisse Group AG, said by phone. “The mechanisms in which supply gets adjusted are not necessarily very rapid. The price will have to undershoot.”

The displacement of marginal Chinese supply has begun as prices retreat, Goldman Sachs said June 3, forecasting the biggest closures in Hebei because that province is the largest producer and has some of the highest costs. As much as 100 million tons could close this year, according to Australia & New Zealand Banking Group Ltd.

Port Inventory

The sustained increase in inventory at China’s ports also provides buyers with a quick source of supply and turns pricing power in their favor, Morgan Stanley said. This adds to the replacement of higher-cost output because volumes were stockpiled at prices at or below marginal costs, it said.

Stockpiles at Chinese ports fell 0.3 percent to 106.5 million tons in the week to June 6 from a record 106.86 million a week earlier, according to Beijing Antaike Information Development Co. Inventories expanded 31 percent this year.

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