(Minews) - Iron ore may drop to less than $60 a metric ton next year as the largest mining companies press on with raising supply, deepening a glut just as demand growth in China falters, according to Roubini Global Economics LLC.
The commodity will average $65 a ton in 2015, with weaker prices in the first half before a recovery as some higher-cost capacity is closed, Director of Commodities Helen Henton said in an interview. While producers won’t fare well in an environment of falling prices, it does make sense for low-cost suppliers to keep expanding in the expectation that less-competitive mines will be shuttered, she said by phone from London.
The biggest producers including BHP Billiton Ltd. (BHP), Rio Tinto Group and Vale SA invested billions of dollars to increase output, pushing the market into oversupply and spurring a 49 percent tumble in prices this year. A slowing Chinese economy may reduce consumption growth in iron ore, used to make steel for buildings and appliances. The raw material will extend losses as supply growth outpaces demand, according to JPMorgan Chase & Co., which this week cut forecasts through 2017.
“The three major companies have announced expanding output and plans to drive down costs rather than cutting output in the hope that some of the higher-cost projects will start shuttering capacity,’” said Henton, who’s tracked iron ore since 2003. “In the meantime, you can get a period of massive surplus. It’s not an irrational decision to do that,” she said yesterday.
Five-Year Low Ore with 62 percent content delivered to Qingdao, China, rose 0.1 percent to $69.14 a dry metric ton yesterday, data compiled by Metal Bulletin Ltd. showed. Prices slumped to $68.49 on Nov. 26, the lowest level in more than five years.
“We’re bearish with the commodities complex as a whole, really. It’s the supply side that makes a difference,” said Henton. “Iron ore is one of the commodities where the surplus is most evident.”
Rio fell 0.3 percent to 2,788 pence in London at 8:17 a.m., dropping for a sixth day, while BHP Billiton rose 0.4 percent to 1,392 pence. In Sydney, Fortescue Metals Group Ltd., Australia’s third-biggest shipper, slumped to a five-year low.
Prices will return to an average of $85 to $90 next year as high-cost mines shut, Vale Chief Executive Officer Murilo Ferreira said last month. Jimmy Wilson, BHP’s president of iron ore, said if the higher “volume doesn’t come from our business, it’s going to come from other businesses,” according to an interview broadcast by Australia’s Nine Network on Nov. 30.
Supply Growth Iron ore may climb back above $80 in the near term as steel output in Hebei, China’s biggest steel-producing province, recovers after output was curbed before a global summit in November, National Australia Bank Ltd. said in a report received today. Further supply growth and weak steel demand in China will probably drive prices toward $75 by the end of 2015, it said.
The world’s largest miners are choosing to overproduce, driving prices lower and forcing the closure of higher-cost suppliers, according to Bank of America Merrill Lynch. The commodity will average $70 next year and $65 in 2016, it said on Dec. 3, cutting forecasts. Citigroup Inc. said on Nov. 11 that iron ore may drop below $60 in the third quarter of 2015.
Imports of iron ore by China fell 15 percent to 67.4 million tons in November from the month earlier, dropping to the lowest level since February, according to data from the country’s customs administration on Dec. 8. Asia’s largest economy, which buys 67 percent of seaborne supplies, is set for its weakest full-year expansion since 1990.
China’s economic growth will slow from slightly less than 7.5 percent this year, to about 7 percent in 2015 and 6 percent by 2018, Thomas Byrne, a senior vice president at Moody’s Investors Service, told a conference in Shanghai today.
“We’re expecting a bumpy landing, particularly from the end of next year through 2016,” said Henton, referring to China. “There’s a shift to a consumer-led economy rather than investment-led, which will have an impact on metals demand, particularly on the steel industry and therefore iron ore.”
