Iron Ore Sinks to Lowest Since 2009 as Global Glut Deepens

Aug 28, 2014 8:36 am ET

(Updates with comment from analyst in fourth paragraph.)

Aug. 28 (Bloomberg) -- Iron ore declined to the lowest level in five years on concern that the economic slowdown in China, the world’s biggest consumer, will curb demand for the steelmaking ingredient as the global surplus expands.

Ore with 62 percent content at the Chinese port of Qingdao dropped 0.7 percent to $87.70 a dry ton today, the lowest since October 2009, according to data compiled by Metal Bulletin Ltd. The raw material fell for a ninth day in the worst run since September 2013.

Prices slumped 35 percent this year, entering a bear market in March, as producers including BHP Billiton Ltd. and Fortescue Metals Group Ltd. are expanding supplies, pushing the market into a glut. Global seaborne output will exceed demand by 72 million tons this year and 175 million tons in 2015, Goldman Sachs Group Inc. estimates. Concerns about the strength of China’s recovery have grown after data this month showed the weakest credit growth since 2008, an unexpected slowdown in industrial output and home prices slumping in more cities.

“What we’re dealing with is essentially oversupply from the major iron ore producers, from Australia in particular,” Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London, said by phone. “They’re pushing too much tonnage into the market against a demand side that’s a little bit lackluster.”

Chinese Inventories

Increasing supplies from Australia, the world’s biggest shipper, and Brazil boosted port inventories in China that are already near the highest ever. Stockpiles climbed to 109.7 million tons as of Aug. 22, a gain of 27 percent this year and near the record 113.7 million tons set in July, according to Shanghai Steelhome Information Technology Co.

“Steelmakers typically adopt a ‘wait and see’ approach during bouts of price weakness to see how low it can go,” Joel Crane, a Melbourne-based analyst at Morgan Stanley, wrote in a report dated yesterday. “Stocks at China’s ports remain high and seaborne volume has increased on the back of Australian output growth.”

Fortescue, Australia’s third-biggest producer, said last week prices are poised for gains as it reported full-year profit rose to a record on higher output. Vale SA, the world’s biggest producer that’s based in Rio de Janeiro, forecast on July 31 that prices would rebound as supply growth slows and higher-cost mines close.

Rio Tinto Group plans to boost output 11 percent this year to 295 million tons, and estimates output of more than 330 million tons from next year. BHP, the third-largest supplier, said production from its Western Australian mines will increase to about 245 million tons in the 12 months to June 30, 2015.

The producers “are trying to out-compete Chinese domestic producers and steal market share from the incumbent suppliers,” Gait said. “They’re using price mechanism by which they hope to achieve that.”

China’s economy, which accounts for about 67 percent of seaborne demand, will probably grow this year at the weakest pace since 1990, according to a Bloomberg survey.