Iron Ore Seen by Citigroup Below $60 as 2015 Forecast Cut

Iron ore prices will plummet to less than $60 a metric ton next year as global supply increases and demand remains weak, according to Citigroup Inc., which slashed its quarterly forecasts for 2015 by as much as 23 percent.

The raw material will average $72 a ton in the first three months of 2015, down from an earlier forecast of $82, Ivan Szpakowski, an analyst in Hong Kong, wrote in a report dated today. The second-quarter forecast was cut to $65 from $80, while the third was reduced to $60 from $78 and the figure for the final three months was put at $62 from $78, he wrote.

Iron ore lost 44 percent this year as surging supplies from BHP Billiton Ltd. and Rio Tinto Group in Australia and Brazil’s Vale SA created a glut just as China’s economy slowed. The surplus will more than double next year, according to Australia & New Zealand Banking Group Ltd., which yesterday cut price forecasts through 2017. Falling ore prices are having a direct impact on Australia’s budget, Treasurer Joe Hockey said today.

“We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness,” Szpakowski wrote in the report, predicting the price will dip into the $50s a ton in the third quarter. “We still have a long way to go” in the bear market, he said in a phone interview.

Ore with 62 percent content delivered to Qingdao rose 0.1 percent to $75.87 a dry ton today, according to Metal Bulletin Ltd. The commodity slumped to $75.38 on Nov. 6, the lowest since September 2009.

Stocks Slump

Producers’ shares retreated. Rio lost 1.3 percent to 2,986 pence in London, taking declines this year to 12 percent, while BHP Billiton fell 1 percent to 1,655 pence at the close. In Sydney, Fortescue Metals Group Ltd. tumbled 4.4 percent, and the stock is 48 percent lower in 2014. Shares of Vale declined to the lowest since September 2006 in Sao Paulo today.

Iron ore’s collapse this year prompted Macquarie Group Ltd. to say in a September report that the global market is in the midst of a transition without precedent in recent commodity history as supply jumps and higher-cost mines shut. The same month, Goldman Sachs Group Inc. declared the “end of the Iron Age” as a Chinese-led demand surge over the past decade that had brought record profits for producers came to an end.

In China, “we expect many mines that shut over the winter to simply not restart,” said Szpakowski, who also reduced price forecasts for 2016 and 2017 while keeping the 2018 outlook at $80. “But the scope of such cuts is likely to be insufficient. As a result, prices will need to fall further.”

Direct Impact

Iron ore prices are 30 percent to 40 percent lower than in May, when Australia’s budget forecasts were made, Hockey said in an Adelaide radio interview today. That has a direct impact on the budget bottom line, he said.

“Obviously we have to respond to the circumstances that we find ourselves in,” Australian Prime Minister Tony Abbott said in an interview in Beijing yesterday when asked if falling ore prices made it harder to cut the budget deficit. “I don’t think we should assume that the iron ore price is stuck at $75.”

While 2015 was seen as another weak year for the iron ore market as supply rises and Chinese steel consumption remains flat, prices may be $80 to $90 a ton, according to Wood Mackenzie Ltd. The market will improve in 2016 and by 2020 prices will be significantly higher than today, Paul Gray, an analyst at Wood Mackenzie, said in an interview yesterday.

“The Brazilian production is growing, the Australian production is growing, China is not having such big demand anymore,” said Kleber Silva, head of iron ore at ArcelorMittal, the world’s biggest steelmaker. “This supports prices of between $75 and $90,” Silva said in an interview at an industry conference in Rio de Janeiro yesterday.

Smaller mining companies are being squeezed by the increase of production from the top producers, which are seeking to gain market share, said Eduardo Costa de Faria, commercial general manager at the mining venture of steelmaker Usinas Siderurgicas de Minas Gerais SA.

“We have now a price war as never seen before, the big ones are changing the iron-ore market,” he told an audience at the same Rio conference today. “There is a super-supply together with depressed or stable demand.”

Supply Growth

About 140 million tons of export supply growth is forecast for next year, according to Citigroup’s Szpakowski. Of the global total, Rio Tinto’s production may increase by 54 million tons, while BHP adds 15 million and Fortescue Metals contributes 7 million, he said in the report. Vale may increase supply by 30 million and increasing output at Anglo American Plc’s Minas Rio project adds a further 10 million, he said.

With prices of $70 to $80, there would be cuts in high-cost supplies from China as well as possible reductions at projects in Canada, Brazil, Iran, Malaysia and the U.S., Szpakowski said. Should iron ore fall to $60 to $70 for a sustained period, cutbacks may spread to West Africa and Russia as well as more projects in Australia, Brazil and Iran, he wrote.

“Citi has been one of the most bearish sell-side institutions on the iron ore price outlook this year,” Szpakowski said in the report. “However, we underestimated the speed at which prices would fall in the second half.”

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