Iron ore: rust in peace

Australia , Commodities , Iron ore , Metals , Steel Nov 12, 2014 No Comments

Iron ore turns to rustThe party’s over for iron ore” declared an ANZ research team returning from a trip to China after discovering demand conditions that were more challenging than thought, while analysts at RBC Capital Markets slashed their price forecasts for this and next year.

Ore with 62 percent content delivered to Qingdao rose 0.1 percent to $75.87 a dry ton yesterday, according to Metal Bulletin Ltd. The commodity slumped to $75.38 on Nov. 6, the lowest since September 2009.

Pummeled by a deepening supply glut, iron ore prices have dived an eye-watering 45 percent this year and there’s no respite ahead for the metal, according to Citi, which forecasts double-digit declines in 2015.

Investment bank Citi has slashed its iron ore price forecast for the next two years by as much as 23 percent and says it will dip below $60 a tonne early next year in the most bearish estimate yet from a financial institution on the glut-hit commodity.

The U.S. investment bank said it expects a “further deterioration” in China’s steel demand in the first quarter of 2015 due to “extremely tight credit conditions, slowing of manufacturing export growth, and the government prioritizing reform over short-term growth.”

“We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness,” the U.S. investment bank said in a report on Tuesday.

The raw material will average $72 a ton in the first three months of 2015, down from an earlier forecast of $82, Ivan Szpakowski, an analyst in Hong Kong, wrote in a report dated 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.

The Citi downgrades followed ANZ’s call on Monday that the party was over for iron ore. “Super high profits enjoyed in the iron ore sector appear to be over“. ANZ expects a 2015 average of $US78/t and says “iron ore prices will not breach $US100/t again”. It estimates the global iron ore supply surplus to peak at 56 million tonnes next year before an improvement in Chinese demand and the closure of high-cost mines in China.

The news does not get any better for the embattled sector, with commodity information service Platts reporting a steep fall in the Chinese steel sector that buys the vast bulk of Australia‘s ore. Its latest China Steel Sentiment Index (CSSI) has dropped to the lowest level since the survey of 50-75 steel industry participants started in May last year.

In Australia, one of the lowest cost iron ore producers globally, Joe Hockey, the country Treasurer, declared that “while the first half of the year saw prices driven lower as supply increased, Q3’s selloff was driven by deteriorating demand and deleveraging of traders and Chinese mills, with prices now selling off on APEC and pollution driven steel production curtailments. We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness”.

Heading into 2015, Citi is expecting an additional 140 million tonnes to hit the market. Rio Tinto is expected to increase export production by 54 million tonnes year-on-year, while Vale is expected to boost production 30 million tonnes and BHP is forecast to add another 15 million tonnes.

“Because of the extraordinarily high price before, many suppliers came into the market, even very rudimentary and manual and family businesses, trying to produce iron ore in every possible way. At $150, everybody wants to ship some,” Claudio Alves, global director of ferrous marketing and sales at Vale, said, according to Bloomberg. “They will have to go out and market will balance.”

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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