Iron Ore Price Outlook Cut Again by Australia on SuppliesPhoebe Sedgman and Jasmine Ng
Australia’s state commodity forecaster cut its iron ore price estimates for this year and 2015, pruning its outlook again as surging production in the world’s largest supplier outpaces demand growth in China.
The commodity will average about $94 a metric ton this year from $105 a ton forecast in June, the Bureau of Resources and Energy Economics said in a quarterly report today. Prices may be $94 a ton in 2015 from $97 estimated in June, it said.
The raw material slumped 41 percent in 2014 to a five-year low after Australian producers including Rio Tinto Group expanded low-cost output, spurring a global surplus even as economic growth slowed in China. Lower prices for Australia’s most valuable commodity export will contribute to a drop in the value of the country’s resource and energy shipments to A$192.4 billion ($170 billion) in the year started July 1 from A$201.4 billion forecast in June, the bureau said in the report.
“There is too much supply,” Credit Suisse Group AG said in a report received today, paring its price forecasts for next year and 2016. Iron ore is on a “path to pitiless pricing with relentless supply expansions by major miners,” the bank said.
The bureau’s forecast for prices this year was reduced to $110 in the March report from $119 a ton in December, before the cut in June. The projections refer to spot ore with 62 percent content free-on-board Australia. The cost of freight to China from Australia is about $9 a ton, according to UBS AG.
Iron ore with 62 percent content delivered to the port of Qingdao in China rose 0.3 percent to $79.90 a dry ton today, snapping six days of losses, according to Metal Bulletin Ltd. The commodity, which is heading for a third quarterly loss, tumbled to $79.69 yesterday, the lowest level since September 2009. Its decline this year beat the 5.7 percent loss in the Bloomberg Commodity Index.
“Prices are expected to rebound from the current low levels but remain well below the high prices seen in previous years due to the supply overhang,” the bureau said. “Further increases in supply indicate increasing price competition will be needed to push more high-cost supply out of the market.”
Shipments from Australia will jump 22 percent to a record 707 million tons this year and climb 8.6 percent to 768 million tons next year, the bureau said today. Previously, it estimated exports at 680 million tons in 2014 and 764 million tons in 2015. China’s total iron ore imports would rise 6.6 percent to 933 million tons next year, it said.
Iron ore prices declined sooner than expected this year and are unlikely to recover, according to Goldman Sachs Group Inc. The surplus will more than triple to 163 million tons in 2015 from 52 million tons this year, the New York-based bank said.
Even as global supply has run past demand growth, mine closures around the world will help prices to level out, according to Wayne Calder, deputy executive director at the bureau, which is known as Bree. Iron ore may average $90 to $95 over the next five years, Calder said in an interview last week.
“The iron ore market is in the midst of a transition without precedent in recent commodity history, with the long-expected displacement cycle happening both earlier and more aggressively than anticipated,” Macquarie Group Ltd. said in a report today. There’s an accelerated battle for survival between Chinese domestic and high-cost seaborne ore, the bank said.
While China’s economy remained stuck in low gear this quarter, according to the China Beige Book yesterday, a gauge of manufacturing topped estimates. The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.5, compared with the median estimate of 50 in a Bloomberg survey of analysts and August’s final reading of 50.2.
Premier Li Keqiang in March set a 2014 target for an increase in gross domestic product of about 7.5 percent. Royal Bank of Scotland Group Plc and Barclays Plc this month lowered their estimates to 7.2 percent. Asia’s largest economy accounts for about 67 percent of seaborne iron ore shipments.
“Chinese buyers do not appear to be stocking up on iron ore as they previously did,” the bureau said. Competition has increased, with suppliers “forced to offer lower prices to make sales and offer higher discounts on lower-grade ores.”
Credit Suisse reduced its price estimate for 2015 by 4 percent to $85 a ton and for 2016 by 3 percent to $84 a ton, according to the report, dated yesterday. Inventory at China’s mills fell to an average of 27 days from 30 days, it said.
“Seaborne supply is still growing well ahead of demand,” Ian Roper, an analyst at CLSA Ltd., said at a seminar in Singapore yesterday. “This is the start of a multiyear downtrend.”