Steelmaker Sees Iron Ore Extending Drop on Mine Overcapacity

Aug 28, 2014 10:26 am ET

(Updates with iron-ore price in third paragraph.)

Aug. 28 (Bloomberg) -- Iron-ore prices will fall further because there’s too much supply of the main ingredient for steel, deepening a slump that’s curbed profits at the biggest miners, according to the head of Austria’s largest steelmaker.

“We still have enormous overcapacity in iron ore,” Voestalpine AG Chief Executive Officer Wolfgang Eder said in an interview. “This will put additional pressure on the price.”

Iron-ore fell to the lowest level in five years today. Ore with 62 percent content at the Chinese port of Qingdao dropped 1 percent to $87.30 a dry ton, the lowest since October 2009. The raw material traded at more than $180 a ton in 2011.

A first-half slump of 30 percent follows the prospect that mine expansions led by Rio Tinto Group and BHP Billiton Ltd. will intensify a glut. At the same time, economic growth has slowed in China, capping demand in the top steel-making nation.

Eder accurately forecast in June 2012 that iron-ore prices would drop below $100 a ton in the following two years as Chinese demand stalled and new mines raised supply. The median 2014 forecast compiled by Bloomberg at the time was $135 a ton.

The biggest mining companies are continuing to add supply. Rio Tinto plans to boost output 11 percent this year to 295 million tons, and estimates output of at least 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 through June.

Seaborne Market

Iron-ore supply on the seaborne market may increase by 45 percent to 1.65 billion tons by 2018, according to Bloomberg Intelligence analysts Christopher Krug and Kenneth Hoffman.

Eder sees prices at $90 to $100 a ton for the rest of 2014 before settling at $80 to $90 in the medium term. “In the long run a fair price will be between $80 and $90 a ton,” he said.

It will cost $101 a ton in the fourth quarter and $105 in 2015, according to the median forecast compiled by Bloomberg.

His comments echo Goldman Sachs Group Inc., which said this month that prices would average $80 a ton next year as supply from Australia meets a slowdown in steel production in China.

“The end of industrialization in China is coming and this will lead to lower steel prices,” said Kirill Chuyko, head of equity research at BCS Financial Group in Moscow. “Steel demand in China remains under pressure. If steel prices are falling, iron ore prices will be falling.”

China’s broadest measure of new credit plunged to the lowest since the global financial crisis in July and industrial output unexpectedly slowed, reports showed this month. Gross domestic product is forecast to rise 7.4 percent this year.