Moody's Says Iron Ore to Extend Slump in 2016 on Excess Supplies

  • Demand slowing as new production comes online, Cowan says
  • Moody's forecasts prices will average $45 a ton next year

Iron ore’s slump will deepen next year as rising supplies from the biggest producers overwhelm weakening demand in China, according to Moody’s Investors Service.

Prices will probably average $45 a metric ton next year and in 2017, said Carol Cowan, Moody’s senior vice president in New York. So far this year, they have averaged about $58. The glut may expand as the majors boost low-cost output and Gina Rinehart’s Roy Hill mine in Australia begins shipments, Cowan said in an interview on Tuesday.

Iron ore is headed for a third year of losses after Rio Tinto Group, BHP Billiton Ltd. and Vale SA boosted exports from Australia and Brazil, betting that increased volumes would offset lower prices as less efficient rivals closed. The slowdown in China, where the world’s top buyer is set for its weakest full-year expansion in a quarter century, has exacerbated the rout.

“We still fundamentally think there’s excess supply relative to demand,” Cowan said by phone. “Demand is slowing, given the slowing steel-production profile in China, which is a key driver in the seaborne market. New supplies continue to come on, certainly through this year and then to 2016.”

Monthly Loss

Ore with 62 percent content delivered to Qingdao added 0.9 percent to $51.50 a dry ton on Tuesday, rising from a three-month low and snapping six days of declines, according to Metal Bulletin Ltd. Prices are headed for the first monthly loss since July, when they bottomed at $44.59, a record in daily data going back to May 2009.

“We basically see Chinese steel production growth, if not flat, down on-year again in 2016,” Cowan said. “We see it still taking a while for the market to balance itself out, which obviously will pressure prices.”

While Westpac Banking Corp. said this month a drop below $50 a ton is likely before year-end and Citigroup Inc. sees further losses in 2016, not everyone is bearish. Prestige Economics LLC predicted iron ore at $58 to $68 next year as China cuts interest rates further. China’s central bank reduced borrowing costs last week.

Clearly Peaked

Crude steel demand in China fell 8.7 percent in September from a year earlier and 5.8 percent in the first nine months, the China Iron & Steel Association said in a statement on Wednesday. Mills shouldn’t pin their hopes on a huge demand revival as consumption has “clearly peaked,” it said.

Faltering demand and slumping prices won’t prevent the largest iron ore producers from expanding because they’re low cost, Cowan said. Some less-efficient competitors in China and elsewhere can also tolerate lower prices for longer as weaker producers’ currencies combine with cheaper energy prices to cut mining costs, she said.

“That gives a little bit more breathing room, if you will, to some higher-cost production that would otherwise come out,” Cowan said. “Our expectations are certainly the big ones are not going to pull back production. The question is whether iron ore producers in China, which are probably higher cost, cut production, by how much and when.”

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