Iron Caps Biggest Monthly Drop Since September as Supply Climbs

By Jasmine Ng  

Iron ore completed the biggest monthly loss since September as Goldman Sachs Group Inc. said it may cut its forecast of $80 a metric ton for 2015 as the focus shifts to growing competition between seaborne producers.
Ore with 62 percent content delivered to Qingdao in China slumped 10.4 percent this week after reaching $68.49 a dry ton on Nov. 26, the lowest level since June 2009, according to data compiled by Metal Bulletin Ltd. Prices advanced 1.9 percent to $71.32 today, posting the first weekly gain in six.
The steel-making raw material has plunged 47 percent in 2014 as BHP Billiton Ltd. (BHP), Rio Tinto Group (RIO) and Vale SA expand output in Australia and Brazil, betting the increase will offset slumping prices and force less competitive mines worldwide to close. A property slump and slowdown in investment growth has set China, the biggest buyer, on course for the weakest full-year growth since 1990.
“We believe the risks are clearly skewed to the downside,” Goldman analysts Christian Lelong and Amber Cai wrote in a report e-mailed today. The New York-based bank has
kept its prediction unchanged since March 2013. The raw material averaged $99.73 this year.
For now, the bank said it was keeping its average price forecasts unchanged partly because of the uncertainty related to recent Chinese statistics.
“The changes in market dynamics following the shift to oversupply have come earlier than we expected,” the analysts wrote in the report headed “The iron ore market presses the fast forward button.”

Seaborne Competitors

China reduced its benchmark lending rate to 5.6 percent from 6 percent last week in its first cut since 2012. That came after expansion in gross domestic product cooled to 7.3 percent in the July-September period, the least since 2009, and after a drop in new-home prices and rising bad loans.
Increased competition between suppliers outside of China is becoming more important as the buffer of high-cost, price sensitive mines in the country is depleted and the Chinese cost curve becomes less relevant to prices, the analysts wrote.
As much as 130 million tons of seaborne production capacity, or about 10 percent of current supply, will have to shut in 2015-2016, the bank said. The need to incentivize these closures and project delays outside of China will be the main price driver, it said.
While 2015 may be another weak year as supply rises, prices will climb to average $85, Paul Bloxham, chief Australia economist at HSBC Holdings Plc, said by phone on Nov. 17. Chinese output may slump 30 percent to 236 million tons next year and support rates, the bank said.

Spending Cuts

Fortescue Metals Group Ltd. (FMG) halved capital expenditure to $650 million in the year through June 2015 from its previous budget of $1.3 billion, joining miners including Rio and BHP in cutting spending. The company’s outlook for shipments for the year is unchanged at 155 million to 160 million tons, the world’s fourth-biggest exporter said today.
Rio, the second-biggest miner, has deferred plans to approve a new $1 billion Australian iron ore mine and lowered its 2014 expenditure estimate. BHP, the largest mining company, has announced that capital outlays will drop to $13 billion in fiscal 2016, down more than 40 percent from 2012.
Ore will drop into the $50s in the third quarter of 2015 and average $65 for the year as a whole, Citigroup Inc. said in a Nov. 11 report which cut price forecasts. The bear market still has a way to go, according to analyst Ivan Szpakowski.