Iron Ore Drops to One-Month Low as Goldman Keeps Bearish View

Iron ore extended losses to the lowest level in a month after Goldman Sachs Group Inc. said increasing production from Australia and Brazil will deepen a global glut every year through 2018.

Ore with 62 percent iron content at the Chinese port of Tianjin fell 0.7 percent to $93.60 a dry ton today, the lowest since June 24, according to data from The Steel Index Ltd. The raw material will average $80 in 2015 from $107 this year, Goldman said in a report, reiterating previous forecasts.

Prices tumbled 30 percent in 2014 as companies from Rio Tinto Group to BHP Billiton Ltd. increased output, betting higher volumes will more than offset falling prices. Citigroup Inc., Deutsche Bank AG and Morgan Stanley see lower rates through 2016 as supply expands. A manufacturing gauge in China climbed to the highest level in 18 months today, signaling a potential recovery in demand from the world’s biggest user.

“The large scale of supply that is entering the market this year will add downward pressure to iron-ore prices,” Gerard Burg, senior Asia economist at National Australia Bank Ltd. in Melbourne, said by e-mail. “The increase in demand from China should be less than the increase in supply.”

Global seaborne output will exceed demand by 72 million tons this year, 175 million tons in 2015 and 323 million tons in 2018, Goldman said. The size of the surplus, which has led to the shuttering of some Chinese mines, will put high-cost seaborne producers at risk, it said.

Seaborne Output

“China will not absorb every ton of incremental seaborne supply,” Goldman analysts including Sydney-based Christian Lelong wrote in the report. “A material amount of seaborne capacity will eventually have to close.”

The economy of China, which purchases about 70 percent of the world’s seaborne ore, is forecast to expand 7.4 percent this year, the weakest pace since 1990, a Bloomberg survey shows. The government has set a target of about 7.5 percent.

BHP, the world’s biggest mining company, had a 19 percent increase in iron ore output to 56.6 million tons in the three months ended June from a year earlier. Rio Tinto boosted output by 11 percent to 57.5 million tons in the period. The companies say their low-cost output will displace marginal Chinese supply.

The biggest Chinese closures may be in Hebei province as it’s the largest producer and its marginal costs are higher than in most other provinces, according to Goldman.

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