Goldman Widens Iron Ore Surplus Forecast on Steel Output

2014-05-22

The global seaborne iron ore glut will probably be 21 percent bigger than forecast next year as steel production slows in China, the world’s largest consumer, according to Goldman Sachs Group Inc.

The surplus will reach 175 million metric tons in 2015, compared with a prior prediction of 145 million tons, Goldman Sachs said in a report dated yesterday. The bank estimates that output will exceed demand by 72 million tons and prices will average $109 a ton in 2014, before dropping to $80 next year.

Iron ore has slumped 27 percent this year as economic growth in China slowed and mining companies from BHP Billiton Ltd. to Rio Tinto Group in Australia boosted output, shifting the global seaborne market into a glut. Banks from Standard Chartered Plc to Credit Suisse Group AG say more Chinese steel mills will go bankrupt and hurt consumption.

“The market is no longer in balance but in the early stage of a structural surplus,” analysts including Christian Lelong wrote in the report. “China will not act as the safety valve in an oversupplied market for much longer.”

Ore with 62 percent iron content delivered to the Chinese port of Tianjin fell 1 percent to $97.50 a dry ton yesterday, the lowest level since September 2012, according to data from The Steel Index Ltd. The decline in iron ore, Australia’s biggest export earner, pulled the country’s dollar today to the weakest level since May 2.

Record Stockpiles

While the last decline below $100 in 2012 spurred buyers to rebuild inventories, boosting prices to about $159 in four months, this time around expectations of ample supply will encourage users to keep reserves at a minimum, said Goldman.

“We believe the current downturn could trigger another destocking cycle of similar scale,” Lelong, Daniel Quigley and Amber Cai wrote. “But the eventual rebound will be far less robust than previously.”

Reduced Chinese imports will also offset any impact of expected supply disruptions in India and a possible strike at Australia’s Port Hedland, the world’s largest bulk-export terminal, the bank said. Maritime Union of Australia, which represents tugboat deckhands at the port, approved unlimited work stoppages of 24 hours, 48 hours and 7 days on May 12.

BHP, the third-largest exporter, won’t be able to make up shipments lost during a strike, the company’s iron ore president Jimmy Wilson said in a statement today. The union said May 12 it hadn’t decided whether to take action.

Port Strike

“Disruption in Port Hedland would be costly for the producers affected and would drive a temporary price rally, but it would ultimately be washed out by global market fundamentals,” Goldman said.

China’s inventory at ports rose 1.8 percent to a record 112.55 million tons in the week to May 16 from a week earlier, according to Shanghai Steelhome Information Technology Co. As much as 40 percent of inventory at ports may be tied up in financing purposes, according to Daiwa Securities Group Inc.

“A meaningful amount of iron ore stockpiles in China is tied to financing, which means an unwinding can be excessive,” said Doug King, the London-based chief investment officer of the Merchant Commodity Fund, which returned 15.4 percent from January to April partly from iron ore. “Real demand will be dampened when those stockpiles are sold into the market.”

China’s economy that creates demand for 69 percent of the world’s seaborne ore will grow by 7.3 percent this year, the lowest since 1990, according to a Bloomberg survey.

The Australian dollar touched 92.16 U.S. cents today. It dropped 0.9 percent yesterday, the biggest loss since March 19.

“Changes in spot iron ore prices affect the currency far more quickly these days,” Gareth Berry, a foreign-exchange strategist at UBS AG, wrote in a client note dated yesterday. “That’s largely due to the demise of annual fixed price iron ore contracts, and the subsequent shift to quarterly, then to monthly, then to spot pricing.”

Shares of BHP fell 0.8 percent to A$37.17 ($34.32) at the close in Sydney today and Rio, the second-biggest exporter, declined 1.1 percent to A$59.40.

Source from : Bloomberg

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