Iron Ore Seen Slumping as StanChart Advises Bets on Declines

Apr 17, 2014 7:47 am ET

April 17 (Bloomberg) -- Iron ore prices are set to slump in the second half as more steel companies in China will probably go bankrupt, hurting demand by the largest user just as supply expands, according to Standard Chartered Plc.

Investors should sell September-through-December contracts on the Singapore Exchange, analyst Judy Zhu wrote in a note dated yesterday after meeting ore producers, consumers and traders in China over the past month. Prices are forecast to drop from an average of $129 a ton this quarter to $114 between July and September and $108 in the final three months, said Zhu.

Iron ore entered a bear market last month as economic growth in China slowed and mining companies in Australia boosted output, shifting the global seaborne market into a glut. Chinese mills, which account for almost half of world steel output, are struggling to get funds after banks imposed stricter lending conditions. Banks from Goldman Sachs Group Inc. to Credit Suisse Group AG predict lower prices in 2014.

“More steel mills are likely to go bankrupt this year,” wrote Zhu, who is based in Shanghai. The expected closures “could have a greater impact on iron ore prices than the supply glut expected from Australia,” she wrote.

Iron ore with 62 percent content delivered to the port of Tianjin rose 0.3 percent to $116.50 a dry ton today, according to The Steel Index Ltd. Prices fell 13 percent this year, dropping to a 17-month low of $104.70 on March 10.

Sell Contracts

“We recommend that investors sell September, October, November and December 2014 contracts traded on the Singapore Exchange because of the increased likelihood that prices will drop below $110 a ton,” said Zhu. While prices may rebound above $120 a ton next month on a seasonal pickup in demand, a sharp drop from June seems inevitable, she wrote.

The outlook from Zhu contrasts with the view from Westpac Banking Corp.’s Justin Smirk, who forecast at a briefing in Singapore on April 15 that iron ore will end the year at $120. Tighter credit conditions in China will hurt local ore output, and the global glut may be smaller than forecast, he said.

Haixin Iron & Steel Group, which can produce 6 million tons a year, recently defaulted on 3 billion yuan ($482 million) in debt, Standard & Poor’s said in a March 31 note. After Haixin’s bankruptcy, China’s government will probably allow insolvent mills to close, Zhu wrote in the report.

Global iron ore output is forecast to outstrip demand in 2014 after companies including BHP Billiton Ltd. and Rio Tinto Group expanded capacity. The seaborne market will switch into a surplus during this quarter, Goldman Sachs said in an April 13 report, forecasting that prices will average $109 a ton this year and decline to $80 a ton in 2015.

BHP’s Production

BHP, the world’s third-largest iron ore exporter, yesterday raised its full-year iron ore production guidance after fiscal third-quarter output rose 23 percent, beating estimates. Rio Tinto, the second-largest mining company, this week reported quarterly iron ore production rose to a record.

China’s gross domestic product rose 7.4 percent in the January-to-March period, the weakest pace in six quarters, the statistics bureau said in Beijing yesterday. Industrial production and fixed-asset investment trailed projections.