(Minews) - UBS Group AG cut iron ore price forecasts as the biggest producers will expand low-cost supply while demand growth remains weak, spurring a glut. Miners’ shares fell, with Fortescue Metals Group Ltd. down 18 percent this week.
Cheaper energy prices are lowering the cost of mining and shipping metals including iron ore, according to the bank, which forecast a rising global surplus. The raw material will average $66 a metric ton this year, 22 percent less than previously forecast, and $65 in 2016, down 21 percent, it said, listing iron ore as its least-favored metal.
Surging low-cost supplies from BHP Billiton Ltd., Rio Tinto Group and Vale SA are outpacing demand growth in China, spurring a 47 percent plunge in prices last year. UBS’s price-forecast cuts follow similar reductions yesterday from Citigroup Inc., which cited rising supplies and cheaper oil. Among projects set to start output this year amid the bear market is the A$10 billion ($8.2 billion) Roy Hill mine in Australia’s Pilbara.
“The iron ore battle for market share will renew in 2015,” UBS analysts including Daniel Morgan wrote. “Demand growth again looks likely to remain anaemic, outstripped by supply growth from the three majors, Minas-Rio and Roy Hill.”
Ore with 62 percent content delivered to Qingdao, China, dropped 0.6 percent to $68.30 a dry ton yesterday, the lowest level in almost three weeks, according to Metal Bulletin Ltd. The benchmark dropped to a five-year low of $66.84 on Dec. 23.
Oil CollapseOil slumped 46 percent last year, the most since the global financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. About 37 percent of iron ore production cost is energy-related, Macquarie Group Ltd. estimates.
“Energy is a key cost input for all mined commodities,” the UBS analysts said. “A lower oil price is a great leveler, delivering larger benefits to those with the most marginal operations.”
The global surplus will swell from 35 million tons this year to more than 200 million tons by 2018, UBS predicted. This year, seaborne supply will expand 6.3 percent compared with demand growth of 4 percent, according to the bank.
Iron ore may climb 10 percent in the first half, Morgan Stanley said on Jan. 12. While exports from Australia and Brazil will rise this year, further supply cuts from some seaborne producers and Chinese mines may help prices hold at about $70 for most of 2015, Westpac Banking Corp. said in a report today.
Rio shares fell as much as 2.7 percent to A$54.04 in Sydney and traded at A$54.125 at 3:25 p.m. local time. BHP, which mines iron ore and supplies crude, dropped as much as 2.6 percent to A$26.50, the lowest price since 2008, before paring losses to A$26.90. Fortescue Metals Group, Australia’s third-largest shipper, dropped for a fourth day to the lowest since 2009.
