Iron-Ore Bear Market Deepens as Aussie Mines Expand: Commodities

Apr 10, 2014 1:34 pm ET

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April 10 (Bloomberg) -- The world is mining more iron ore than steelmakers need.

Australia, the largest supplier, sent 504 ships from Port Hedland during the first quarter carrying enough iron-ore exports to build more than 700 Golden Gate Bridges. Shipments jumped 35 percent to the biggest buyer, China, where inventories have ballooned to the highest ever.

After companies including BHP Billiton Ltd. and Rio Tinto Group expanded capacity to meet surging steel demand, output is climbing just as China’s economy slows to the weakest since 1990. Prices that already are down 15 percent in the past year will slump at least 16 percent further in the second half to less than $100 a metric ton, the lowest level since 2012, according to Credit Suisse Group AG and Standard Chartered Plc.

“Supply growth will overtake demand growth this year for the first time in a long time,” said Christian Lelong, a Sydney-based commodity analyst with Goldman Sachs Group Inc., which predicts prices to average $108 this year and slide to $80 in 2015. “You will start to see some signs of surplus probably during the course of the second quarter.”

Shipments from Port Hedland, about 1,300 kilometers (808 miles) north of Perth, surged 35 percent to a record 90.4 million tons in the first three months, the port authority says. Exports to China accounted for 79 percent of the total, including 27 million tons in March, the most ever.

More Ore

During the quarter, the total of 504 departing ore carriers was up 30 percent from a year earlier and included 42 ships that hauled at least 230,000 tons each, up from 11, the port says. It takes about 1.6 tons of ore to produce 1 ton of steel, which is used in cars, appliances and building materials, according to the Organization for Economic Cooperation and Development.

The price of ore with 62 percent iron content delivered to the port of Tianjin in China is down 11 percent this year at $119.10 a dry ton, after plunging into a bear market and falling to a 17-month low of $104.70 on March 10. The Standard & Poor’s GSCI Spot Index of 24 commodities advanced 3.3 percent since the end of December, while the MSCI All-Country World index of equities rose 0.2 percent. The Bloomberg Treasury Bond Index added 2 percent.

Australia will ship 687 million tons of iron ore this year, 19 percent more than last year, the Bureau of Resources and Energy Economics estimates. More than 70 percent is shipped to China, according to the Australian government. In the second half of 2014, the global surplus of seaborne ore may reach 64 million tons, up from 14 million in the first six months, according to Morgan Stanley.

Expanded Mines

Rio Tinto, the second-biggest iron-ore exporter, plans to boost total output 11 percent this year to 295 million tons, the London-based mining company said Feb. 13. Capacity is almost tripling to 155 million tons at Fortescue Metals Group Ltd., based in Perth, Western Australia, and the country’s third- biggest producer. Melbourne-based BHP said its Jimblebar expansion in Western Australia was completed six months early.

Australia production will increase 17 percent to a record 651.4 million tons in the 12 months to June 2014, according to the Bureau of Resources and Energy Economics. That compares with a 10 percent expansion in the previous period.

About 92 million tons of new supply will come from Australia this year, according to London-based Standard Chartered, which predicts a global surplus of 136 million tons, compared with a deficit of 77 million tons in 2013. Global seaborne supply will increase 10 percent to 1.329 billion tons in 2014, pushing the surplus to 74 million tons from 4 million tons, according to Zurich-based UBS AG. Goldman predicts a glut of 80 million tons.

China Spending

The surplus may be smaller than forecast. China announced plans this month to boost spending on infrastructure that would require more steel, and tugboat operators in Australia are threatening a strike that may disrupt shipments. Prices have pared this year’s decline, gaining 13 percent since touching the low on March 10.

China’s State Council targeted 150 billion yuan ($24 billion) of bond sales in 2014 to build railways, mainly in the less-developed central and western regions, and said it will expand plans to speed up construction projects after slowdowns in manufacturing, retail sales and investment. China’s economy expanded sevenfold since 2000, boosting demand for the raw material used to build skyscrapers and railways.

China Stimulus

Premier Li Keqiang used infrastructure spending last year to help spur growth in what Bank of America Corp. described as a “mini fiscal stimulus,” boosting iron-ore prices as much as 29 percent from June to August. China’s economic growth is set to slow to 7.4 percent this year from 7.7 percent in 2013, according to the median of 55 economist estimates compiled by Bloomberg, increasing pressure on Li to address growth below what he calls a flexible target of about 7.5 percent.

Investors betting against China and its demand for iron ore will be proven wrong, Murilo Ferreira, the chief executive officer of Vale SA, the largest iron-ore producer in Brazil, said on March 19. Growth in China, the world’s second-largest economy, is still more than twice the 2.7 percent forecast in the U.S., a separate Bloomberg survey of economists shows. China accounted for about 72 percent of the iron ore imported globally last year, according to Bloomberg Industries.

If prices drop to $100, supplies in China may be hurt as domestic mines with high production costs are forced to cut output or close, the Australian government forecaster said. By comparison, Rio Tinto can be profitable above A$39 ($37), while BHP’s break-even is A$41 and Fortescue’s is A$56, UBS estimates.

Potential Strike

A possible strike by tugboat operators at Port Hedland may disrupt shipments. The Maritime Union of Australia is balloting its workers on a potential strike and expects the results by the end of April. The union is seeking additional pay and leave entitlements.

While China’s stimulus measures may help support prices, the gains probably won’t last, according to Credit Suisse.

“The underlying mismatch between supply growing at 11 percent and demand advancing at closer to 4 percent should leave iron-ore prices very vulnerable to further falls,” the Zurich- based bank said in a report on March 31.

Australia isn’t the only producer boosting output. In Brazil, the second-biggest shipper, supply will rise 10 percent to 410 million tons in 2014, according to Deutsche Bank AG.

Chinese port inventories climbed to a record 103.83 million tons in the week ended April 4, valued at about $12 billion, as traders boosted purchases to use as collateral, according to Beijing Antaike Information Development Co. About 40 percent of ore at China’s ports are part of finance deals, Mysteel Research estimates, with the material held to secure funding.

Bearish Outlook

BHP Chief Executive Officer Andrew Mackenzie said Feb. 18 that very strong supply growth may drive prices lower, echoing Rio Tinto Chief Executive Officer Sam Walsh’s December forecast that new capacity will cut prices. Iron ore accounts for about 31 percent of BHP’s revenue and about 47 percent of Rio’s, according to data compiled by Bloomberg. It is Australia’s most- valuable commodity export.

“We’re still bearish on iron-ore prices,” said Ivan Szpakowski, an analyst in Hong Kong at Citigroup Inc. “We’re forecasting a pretty large surplus, and we think that’s going to be the case regardless of the exact growth rate you get out of China or the exact price you have iron ore. It’s pretty unavoidable this year.”

--With assistance from Madelene Pearson in Singapore.