What Next for Iron Ore? No Good News for Bulls, FCStone Says

Updated on

Iron ore will probably extend declines in 2015 as global supply exceeds demand and the world’s largest producers plan to add production, according to INTL FCStone Inc., which described last year’s rout as incredible.

The ferrous sector remains chronically oversupplied and further weakness in iron ore prices is expected over the year, analysts including Edward Meir and Spencer Johnson wrote in an e-mailed report on the outlook for commodities and currencies. While there may be a climb of $5 to $7 a ton in the early part of 2015, there’s no good news for bulls amid the glut, according to the report, which was received today.

The raw material, which lost 47 percent last year as BHP Billiton Ltd. and Rio Tinto Group expanded output, opened 2015 with the biggest weekly gain in 18 months amid speculation China will take steps to spur growth. The country is accelerating 300 infrastructure projects this year as part of a broader 10 trillion yuan ($1.6 trillion) plan, according to people familiar with the matter. It’s doubtful that additional stimulus in China will be significant enough, said INTL FCStone.

“There is no good news ahead for the iron ore bulls,” wrote Johnson. “Production rates are still projected to rise amongst the major three, offsetting declines from the higher-cost producers. Chinese demand is the usual wild card.”

Ore with 62 percent content delivered to Qingdao, China, rallied 5.8 percent last week, the biggest gain since July 2013, and advanced to $71.49 a dry metric ton on Jan. 6, the highest level since Dec. 5, according to Metal Bulletin Ltd. The benchmark lost 0.7 percent to $70.96 yesterday.

Rio Climbs

Rio Tinto stock rose 1.3 percent to 3,000 pence at 8:15 a.m. in London, rising for a third day, while BHP gained 0.3 percent to 1,345.5 pence. Fortescue Metals Group Ltd., which sank 53 percent in Sydney in 2014, lost 2.6 percent to A$2.67.

Iron ore will average $79 a ton this year, according to Morgan Stanley, and analyst Tom Price said last month that, in terms of falling prices, the worst is probably over. Still, Citigroup Inc. forecast that it may plunge to less than $60 a ton this year as global supply increases and demand remains weak. Last year, the raw material averaged $96.97 as Rio Tinto, BHP and Brazil’s Vale SA expanded low-cost output.

“Despite the collapse in iron ore prices last year, the majors increased output to lower breakeven costs and squeeze marginal producers,” wrote Meir. “In the case of steel, Chinese production is moderating on a year-over-year basis, but steel mills are still cranking out too much metal, leaving many to look to the export market for relief.”

China Slowdown

Hurt by a housing slump and industrial overcapacity, China’s economy probably expanded in 2014 at the slowest pace in more than two decades, according to a Bloomberg survey. The central bank cut interest rates in November for the first time since 2012 to boost growth in the second-largest economy.

While China is promoting key investment projects in seven areas to woo private capital, it isn’t repeating its stimulus program started in 2008, according to Luo Guosan, an investment official at the National Development and Reform Commission. It’s about guiding social capital into projects, not a stimulus program by expanding fiscal input, Luo said today.

Iron ore exports to China through Australia’s Port Hedland, the world’s biggest bulk-export terminal, rose to 30.6 million tons last month from 29 million in November, according to port data. Brazil, the biggest exporter after Australia, shipped the most iron ore in December since 2005 as Vale SA boosted output.

Lower Stockpiles

Inventories at Chinese ports declined for a sixth week to

100.6 million tons as of Jan. 2, the lowest level in almost 11 months, according to Shanghai Steelhome Information Technology Co. Stockpiles dropped 12 percent since peaking at 113.7 million tons in July as mills replenished holdings.

While prices may rebound in the near term as China restocks, the market will probably remain oversupplied through 2016, according to Lucas Pipes, senior analyst at Brean Capital LLC in New York. Lower energy costs may improve producers’ margins and exacerbate the glut, he said this week.

The iron ore market shifted to a surplus in mid-2014 and the excess will widen to about 300 million tons by 2017, Goldman Sachs Group Inc. analysts Fawzi Hanano and Eugene King said in a Nov. 6 report. Producers led by BHP and Rio embarked on $120 billion of spending on mines since 2011, Goldman said.