China Adds to Iron Ore Glut as Record Output Seen This Year

Jun 16, 2014 11:38 pm ET

(Updates iron ore price in third and fifth paragraphs.)

June 16 (Bloomberg) -- Production of iron ore in China, the world’s biggest consumer of the key steelmaking ingredient, will climb to a record this year as bigger mines open, adding to a global glut that’s depressing prices.

Output of low-grade, unprocessed iron ore may rise 5.6 percent to 1.52 billion metric tons this year, Shi Zhenglei, a Shanghai-based analyst with Mysteel.com, China’s largest industry consultancy, said in a phone interview. That’s about 400 million tons of seaborne equivalent, he said.

The potential extra production from China comes even as iron ore entered a bear market in March and fell below $90 today for the first time since 2012 as top miners including Rio Tinto Ltd. and BHP Billiton Ltd. expanded output. An increase in Chinese iron ore output would weigh on prices and boost steel mills’ bargaining power over imports, Shi said.

“Larger mines are usually owned by steelmakers so production is mostly for their own need,” said Shi. “Although mining is money-losing at current prices, they have to put the new mines into operation to achieve cash flow because they’ve spent a lot on the construction work.”

Iron ore with 62 percent content delivered to the port of Tianjin declined 2.1 percent to $89 a dry ton today, the first time the price fell below $90 since Sept. 7, 2012, according to The Steel Index Ltd.

Production of unprocessed ore in China was 1.44 billion tons last year, or about 380 million tons of seaborne equivalent, Mysteel’s Shi said.

Iron Content

Chinese iron ore typically contains half or less of the iron content found in ore from Australia, the world’s top shipper. China’s raw ore has an average iron content of 26 percent, according to Shi, compared with the global benchmark of 62 percent iron.

An oversupply of iron ore may last until 2020, Paul Gray, steel and iron ore markets analyst at Wood Mackenzie Ltd., told reporters in Sydney today. Wood Mackenzie forecasts an average iron ore price of $101 a ton in the second-half of 2014 and $98 a ton in 2015, he said.

Morgan Stanley last week reduced its estimate for average iron ore prices to $105 a ton this year from an earlier forecast of $118 in May. Prices may average about $90 a ton in 2015, a drop of 21 percent from an earlier estimate, the bank said.

Producers in China face a rising challenge of cheaper supplies from Australia and Brazil that are spurring a global glut and hurting prices, according to Goldman Sachs Group Inc. and Australia and New Zealand Banking Group Ltd. Australia’s share of Chinese iron ore imports are forecast to increase to more than 60 percent by 2020, Wood Mackenzie forecast today.

--With assistance from James Paton in Sydney and Jasmine Ng in Singapore.