IRON-ore prices will plummet to less than $60 a metric tonne next year as global supply increases and demand remains weak, according to Citigroup, which slashed its quarterly forecasts for next year by as much as 23%.
The raw material will average $72 a tonne in the first three months of next year, down from an earlier forecast of $82, Ivan Szpakowski, an analyst in Hong Kong, wrote in a report yesterday. The second-quarter forecast was cut to $65 from $80, while the third was reduced to $60 from $78, and the figure for the final three months was put at $62 from $78, he wrote.
Iron ore lost 44% this year as supplies from BHP Billiton and Rio Tinto Group in Australia and Brazil’s Vale created a glut as China’s economy slowed. The surplus will more than double next year, according to Australia & New Zealand Banking Group, which on Monday cut price forecasts through 2017.
Falling ore prices are having a direct effect on Australia’s budget, Treasurer Joe Hockey said.
"We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness," Mr Szpakowski wrote, predicting the price will dip into the $50s a tonne in the third quarter. "We still have a long way to go" in the bear market, he said in a phone interview.
Ore with 62% content delivered to Qingdao fell to $75.80 a dry tonne on Monday, extending the biggest weekly drop since May, according to Metal Bulletin. The commodity fell to $75.38 on November 6, the lowest since September 2009. Producers’ shares retreated in Sydney. Rio lost 1.2% to A$60.51, ($52.23) taking declines this year to 11%, while BHP Billiton fell 1.5% to A$34.17. Fortescue Metals Group tumbled as much as 5.2% to A$2.995, the lowest since July last year, and closed at A$3.02.
Iron-ore’s collapse this year prompted Macquarie Group to say in a September report that the global market is in the midst of a transition without precedent in recent commodity history as supply jumps and higher-cost mines shut. Goldman Sachs declared the "end of the Iron Age" as a Chinese-led demand surge over the past decade that had brought record profits for producers came to an end.
In China, "we expect many mines that shut over the winter to simply not restart," said Mr Szpakowski, who also reduced price forecasts for 2016 and 2017 while keeping the 2018 outlook at $80. "But the scope of such cuts is likely to be insufficient. As a result, prices will need to fall further."
Iron-ore prices are 30%-40% lower than in May, when Australia’s budget forecasts were made, Mr Hockey said. That has a direct effect on the budget bottom line, he said.
"Obviously we have to respond to the circumstances that we find ourselves in," Australian Prime Minister Tony Abbott said in Beijing on Monday when asked if falling ore prices made it harder to cut the budget deficit. "I don’t think we should assume that the iron-ore price is stuck at $75."
While next year was seen as another weak year for the iron-ore market as supply rises and Chinese steel consumption remains flat, prices may be $80-$90 a tonne, according to Wood Mackenzie. The market will improve in 2016 and by 2020 prices will be significantly higher than today, Wood Mackenzie analyst Paul Gray said.
ArcelorMittal head of iron ore Kleber Silva said: "The Brazilian production is growing, the Australian production is growing, China is not having such big demand anymore. This supports prices of between $75 and $90."
About 140-million tonnes of export supply growth is forecast for next year, said Mr Szpakowski.
Of the global total, Rio Tinto’s production may increase 54-million tonnes, while BHP adds 15-million and Fortescue Metals contributes 7-million, he said.
Vale may lift supply by 30-million and increasing output at Anglo American’s Minas Rio project adds a further 10-million, he said.
With prices of $70-$80, there would be cuts in high-cost supplies from China as well as possible reductions at projects in Canada, Brazil, Iran, Malaysia and the US, Mr Szpakowski said. Should iron ore fall to $60-$70 for a sustained period, cutbacks may spread to West Africa and Russia as well as more projects in Australia, Brazil and Iran, he wrote.
"Citi has been one of the most bearish sell-side institutions on the iron ore price outlook this year," Mr Szpakowski said in the report.
"However, we underestimated the speed at which prices would fall in the second half."
(Source - Business Day Live, Nov 12, 2014)
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