Iron Ore Rout Caps Record Losing Run as Forrest Sees Risk of $80

May 30, 2014 2:41 pm ET

May 30 (Bloomberg) -- Iron ore capped a sixth monthly drop in the longest losing run on record as rising supplies from Australia and Brazil spur a global glut. Fortescue Metals Group Ltd. said there could be further losses, with a risk prices may retreat to the lowest level since 2009.

Ore with 62 percent content delivered to Tianjin tumbled 4.1 percent to $91.80 a dry ton, the lowest level in 20 months, according to data from The Steel Index Ltd. today. The steel- making raw material sank 12.9 percent in May, and has dropped every month since December in the longest run of monthly losses since the data series began in November 2008.

Iron ore entered a bear market in March as the biggest miners including BHP Billiton Ltd. and Rio Tinto Group raised output, spurring forecasts for a rising global surplus. Slowing growth and tight credit conditions in China have restricted the expansion of demand in the world’s largest user. The price drop validates a forecast from Goldman Sachs Group Inc. in November that the commodity would see a significant decline in 2014.

“We think it is mainly a supply story,” Christian Lelong, an analyst at Goldman Sachs in Sydney, said in an e-mail yesterday in response to questions from Bloomberg. “Demand is clearly growing at a slower pace, but supply growth is particularly strong after years of overinvestment.”

Iron ore may drop to as low as $80 over the next 12 months, Fortescue Chairman Andrew Forrest told a conference in Melbourne today. The benchmark tracked by The Steel Index last traded below $80 in September 2009.

Forrest’s View

“I’m pretty comfortable with the iron ore price oscillating around the $110 mark,” said Forrest, who heads Australia’s third-largest shipper. “I think it could wander down to $80, it could wander up to $140.”

The raw material has lost 32 percent this year compared with the 2.8 percent advance for the Standard & Poor’s GSCI Spot Index of 24 commodities and 3.1 percent gain for the MSCI World Index of equities.

Rio shares declined as much as 4.4 percent to 3,047.50 pence in London, the lowest since October. Stock in BHP retreated as much as 4.1 percent in London.

Iron ore will average $109 a ton in 2014 and $80 next year, Goldman forecasts. So far in 2014, it’s averaged $116. The bank boosted its estimate for next year’s surplus to 175 million tons from 145 million tons in a May 20 report.

The worldwide seaborne surplus will increase to 79 million tons this year and 158 million tons in 2015 from last year’s 1 million tons, Morgan Stanley said in a report on May 26. Global supplies will expand 10 percent in 2014, outstripping the 3.7 percent rise in demand, according to the bank.

Chinese Economy

Gross domestic product in China, the world’s largest steelmaker, will grow 7.3 percent this year, according to a Bloomberg survey. While that’s set to be the least since 1990, it’s still more than double expected growth in the U.S.

Premier Li Keqiang said pressures for a downturn are “relatively large” and the nation will adjust policy to support the economy, according to a statement on May 23. Economists at Nomura Holdings Inc. said that Li’s comments signaled looser borrowing conditions.

“Even if the government tries to come up with measures to prop up the economy, the problem for iron ore is oversupply,” Helen Lau, an analyst at UOB Kay Hian Ltd. in Hong Kong, said by phone. “The oversupply issue will outweigh demand recovery.”

Iron ore prices are unlikely to rise in the next two to three months because of increasing supplies from imports, high port inventories and a slowdown in steel-product demand, China’s National Development & Reform Commission said on May 28.

Record Stockpiles

Stockpiles at Chinese ports climbed 0.7 percent to a record 113.30 million tons in the week to May 23 from a week earlier, according to Shanghai Steelhome Information Technology Co. Inventories have expanded 31 percent this year.

Shipments from Australia and Brazil are expected to grow 28 percent over the next five years till 2019 to reach 1.3 billion tons, data from Australia’s Bureau of Resources and Energy Economics, or BREE, showed in a quarterly report in March.

A union representing tugboat deckhands at Australia’s Port Hedland deferred a strike on May 22 and said it would apply to extend the period in which it can take industrial action, risking disruption to iron ore shipments from the world’s largest bulk-export terminal. A second union representing tugboat masters at the port approved work stoppages from two to 72 hours, the Fair Work Commission said today.

Port Hedland

Industrial action may hurt exports by miners including Fortescue and BHP, which estimated that disruption will cost users about $94 million a day. Shipments through Port Hedland made up more than a quarter of worldwide seaborne trade last year, according to Bloomberg calculations based on figures from BREE, with 81 percent of the port’s ore going to China.

Surging supplies of seaborne ore will challenge producers in China, probably forcing some higher-cost capacity in the country to close, BHP and Goldman said separately on May 7.

Operating costs at about 80 percent of China’s domestic iron ore mines are $80 to $90 a ton, according to Xia Yang, a Shanghai-based analyst at Mysteel, China’s biggest steel researcher. That compares with A$39 ($37) for Rio Tinto, A$41 for BHP and A$56 for Fortescue, UBS AG estimated.

Shares of Perth-based Fortescue have tumbled 24 percent in Sydney this year. Vale SA, the world’s biggest iron ore exporter, advanced 0.3 percent in Sao Paulo yesterday, trimming the drop this year to 19 percent.