Goldman Unit Sees Iron Ore Losses as Prices Near $50

  • Mining majors add low-cost output in quest for market share
  • Port stockpiles in China expand to highest level since May

Iron ore is sinking back toward $50 a metric ton as expanding low-cost supply and sputtering demand in China spur concern a global glut will persist into 2016, with Goldman Sachs Asset Management Australia Pty forecasting significant losses.

“It’s going down significantly,” Katie Hudson, managing director and senior investment manager at Goldman Sachs Asset Management Australia, said in an interview on Tuesday. “The major producers are adding incremental volume at around $20 a ton, that gives you a sense of where the vulnerability is.”

Ore with 62 percent content delivered to Qingdao rose for the first time in seven days, adding 0.9 percent to $51.50 a dry ton Tuesday after falling to $51.03 Monday, the lowest since July 16, according to Metal Bulletin Ltd. The raw material -- which bottomed at $44.59 on July 8, a record in daily price data dating back to 2009 -- is set for the first monthly loss since July. 

The renewed decline shows that the global market has yet to reach a balance as the biggest miners boost cheap output while steel consumption contracts in China. Rio Tinto Group and Vale SA reported increases in quarterly supply this month as data from China showed slowing economic growth and a further drop in steel production. With many mills in China losing money as steel prices languish, Shanghai Baosteel Group Corp. Chairman Xu Lejiang has forecast nationwide output may eventually slump 20 percent.

‘Significant Downside Risk’

“We have a more cautious view on the iron ore price today that reflects both our concern about increasing supply and what we see as a more modest demand environment,” Hudson said in Melbourne, adding that the bank forecasts prices below $50 on a long-term view. “The iron ore price has got significant downside risk from here.”

While benchmark prices have held between $50 and $60 since July 10, supported by low port stockpiles in China, Westpac Banking Corp. said this month that the $10 range would probably give way before year-end. Citigroup Inc. has said prices will drop below $40 in the first half of 2016 as supply jumps while steel output contracts.

Crude-steel output in China, which accounts for half of global production, shrank 3 percent to 66.12 million tons in September on-year as local demand fell. Shanghai Baosteel’s Xu told reporters in Shanghai last week that the contraction in China’s production would eventually match the experience seen in the U.S., Europe and elsewhere.

China Rates

Iron ore’s recent drop comes even as policy makers in China introduced a measures to stabilize growth. The central bank announced further cuts to the benchmark lending rate and banks’ reserve requirements on Friday. Leaders gather this week to map out a five-year plan for the world’s No. 2 economy.

The biggest producers are still adding output, seeking to lower costs per ton, expand sales and take market share from less efficient rivals. BHP Billiton Ltd., the world’s largest mining company, said Oct. 21 iron ore output rose 7 percent to 61.3 million tons in the three months to Sept. 30, two days after Brazil’s Vale said it produced a record 88.2 million tons in the period. Rio reported third-quarter output rose 12 percent.

The weak price is not eliciting a response “in terms of delaying supply -- in fact, if anything it is accelerating supply -- and it’s had no impact on demand despite the price halving,” Hudson said. Goldman Sachs Asset Management Australia is underweight the iron ore sector, she said.

Fortescue Metals Group Ltd. forecast that it will cut its cash costs below $15 a wet ton in the three months to June 30, Chief Executive Officer Nev Power said in a statement on Tuesday. Australia’s third-largest shipper reduced first-quarter production costs 24 percent, it said this month.

Holdings at ports in China, tracked as one gauge of demand, have started expanding again. The stockpiles rose 0.9 percent to 83.95 million tons on Oct. 23, the highest level since May, according to data from Shanghai Steelhome Information Technology Co.

(Corrects attribution to bank unit in headline, first paragraph.)
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