Iron Ore Slump Deepens as BHP Predicts Years of Lower Prices

  • Stockpiles at ports in China climb to highest level since May
  • Steel mills tend to curb output before winter, hurting demand

Iron ore extended a slump below $50 a metric ton, dropping to the lowest level since July, as BHP Billiton Ltd. forecast prices will probably extend their decline for years as output rises, while Vale SA reaffirmed plans to increase low-cost supply.

Prices will deteriorate gradually until they find a level well below $50, Alan Chirgwin, BHP vice president of marketing for iron ore, told the Australian Financial Review in remarks verified by Emily Perry, a company spokeswoman in Melbourne. Vale plans to sell 300 million tons in China in 2019, up from 180 million next year, China’s Caixin magazine said, citing Chief Executive Officer Murilo Ferreira.

Iron ore sank 12 percent in October as surging production from low-cost miners including BHP, Vale and Rio Tinto Group combined with weaker consumption in China to spur a glut. The top miners are betting that higher output will enable them to cut unit costs and raise market share while less efficient producers get squeezed. China’s steel industry contracted further last month, according to the purchasing managers’ index, as the China Iron & Steel Association said steel demand is shrinking at unprecedented speed.

‘Fundamental Issues’

“You’ve got steel mills having very tight margins for a long time, you’ve got ample supply coming out,” Kelly Teoh, an iron ore derivatives broker at Clarksons Platou Futures Pte in Singapore, said by phone. “You’ve got fundamental issues persisting, so nothing’s really changed. Do you think it will last? It’s not going to change in the short term.”

Ore with 62 percent content delivered to Qingdao retreated 0.8 percent to $49.11 a dry ton on Tuesday, the lowest since July 9, according to Metal Bulletin Ltd. Prices -- which bottomed at $44.59 on July 8, the lowest since daily data began in 2009 -- lost 31 percent this year. They peaked at $191.70 in 2011.

Iron ore will drop over the next few years before finding a new level at the highest break-even of a major producer in Australia or Brazil, Chirgwin told the Review. The price will depend on miners’ cost structures, as well as their ability to preserve them and bring them down, he was quoted as saying.

Vale’s spokeswoman in Shanghai, Vicky Yao, confirmed the comments by Ferreira. The Rio de Janeiro-based company is producing more higher-quality ore while halting some of its most expensive output to navigate the oversupplied market.

Mills tend to curb production before the northern hemisphere winter lull, denting ore demand. Port stockpiles in China rose 1 percent to 84.75 million tons last week, the highest since May, according to Shanghai Steelhome Information Technology Co. The gain was the third weekly increase, the longest run of advances since last November.

Iron ore will probably decline below $40 before year-end on seasonally weaker demand, according to Michael Coleman, managing director of RCMA Asset Management Pte, which runs the Merchant Commodity Fund. Miners have been successful in reducing costs, which means prices may tumble to $35, he said.

— With assistance by Jasmine Ng, and Jake Lloyd-Smith

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