Iron Ore Seen at $50 by Citi as Samarco Helps Delay Slump

  • Samarco supply disruption bullish for pellet, lumps, bank says
  • Prices may resume drop to below $40 after Lunar New Year

Iron ore will probably hold near $50 a metric ton by year-end rather than tumble to $40 as supply disruption at a venture owned by the world’s largest miners may boost prices, according to Citigroup Inc.

The loss of 25 million to 30 million tons a year of supply from Samarco Mineracao SA will coincide with cuts in Chinese production, lifting prices of pellets and lumps, the bank said in a report on Monday. The benchmark iron ore price will resume a decline to below $40 when sizable cuts to China’s steel output occur next year after the Lunar New Year, Citigroup said.

The raw material breached $50 last month amid concern a global glut may expand. The largest producers including BHP Billiton Ltd. and Vale SA expanded output, helping to spur the commodity’s 64 percent plunge since the start of 2014 as China’s demand slowed. Samarco, a venture between BHP and Vale that’s the world’s second-biggest producer of pellets, plans to suspend output and shipments when existing stockpiles run out. BHP said its production guidance is under review.

“The loss of such volumes at the same time that Hebei and much of northern China received the first snow of the season suggests a bullish outlook for pellet and lump premiums,” analysts including Ivan Szpakowski wrote. “We continue to expect a larger shakeout in iron ore prices to occur post-Chinese New Year.”

Pellet Premiums

Iron ore -- the commodity that’s used to make steel -- is produced and shipped in different forms, and pellets are small balls made from the powder generated during the ore extraction, according to Vale’s website. Samarco, which accounts for more than 20 percent of global pellet exports, produced 25 million tons last year, most of which were pellets, Citigroup estimates. Pellets typically trade at a premium to fines, according to CRU Group senior consultant Adrian Doyle, who said that differential may now widen.

Iron ore fines with 62 percent content delivered to Qingdao fell 1 percent to $48.21 a dry ton on Friday, taking losses this year to 32 percent, according to Metal Bulletin Ltd. The price of 65 percent content blast furnace pellets delivered to the same Chinese port fell 2 percent to $67.92 a dry ton on Nov. 6, according to weekly data from Metal Bulletin.

Two tailings dams ruptured at the Samarco mine in southeast Brazil Thursday, burying dozens of homes in mudslides, while killing at least one person and leaving many missing. Clean-up, community support, litigation and rebuilding of the dam, if approved, may mean that Samarco is closed until fiscal 2019, Deutsche Bank AG analyst Paul Young wrote in a report dated Nov. 6.

Under Review

BHP’s Chief Executive Officer Andrew Mackenzie will travel to Brazil this week to meet the response team, authorities and members of affected communities. Prosecutors there are seeking the suspension of licenses at Samarco as well as compensation for victims. A third dam is being monitored, BHP said on Monday, adding that its production guidance of 247 million tons for fiscal 2016 is being reviewed.

The company’s vice president of iron ore marketing Alan Chirgwin has forecast that prices will extend their decline for years before finding a level well below $50 at the highest break-even of a major producer. Top miner Vale plans to sell 300 million tons in China in 2019, up from 180 million tons next year.

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