Morgan Stanley lowered its iron ore price forecasts for the next two years as an Australia-led supply surge counters the closure of high-cost mines, sending the steel-making ingredient to a five-year low.
Iron ore will average $79 a ton in 2015, down 9 percent from a previous estimate, analysts Tom Price and Joel Crane wrote in a report today. The bank reduced its outlook for 2016 by 14 percent to $75 a ton, they said.
The biggest producers including BHP Billiton Ltd. (BHP), Rio Tinto Group and Vale SA have invested billions of dollars to increase output, pushing the market into oversupply and spurring a 49 percent slump in prices this year. It makes sense for low-cost suppliers to keep expanding in the expectation that less-competitive mines will be shuttered, according to Roubini Global Economics LLC. Australia this week predicted the commodity will trade at about $60 over the next two years.
“Led by Australia in 2014, the relatively low-cost supply surge continues to dramatically alter the character of the industry’s supply side,” the Morgan Stanley analysts wrote. “Many of the mining operations that emerged over the past decade are unviable at current prices. The most exposed of these include low-grade iron ore operations in Hebei province, northeast China, and small operations in Australia and Brazil.”
Ore with 62 percent iron content delivered to Qingdao, China, added 0.1 percent to $69.06 a dry metric ton yesterday, data compiled by Metal Bulletin Ltd. showed. Prices slumped to $68.49 on Nov. 26, the lowest since June 2009. The raw material may drop to less than $60 next year, Citigroup Inc. estimates.
Idled Mines
More than 150 million tons per year of capacity has been idled, reduced or closed as of this month, according to Morgan Stanley. That represents about 10 percent of estimated seaborne and China production capability in 2014, it said.
BHP has signaled there won’t be a slowdown in the drive by producers to boost output. If the higher “volume doesn’t come from our business, it’s going to come from other businesses,” Jimmy Wilson, BHP’s president of iron ore, said in an interview broadcast by Australia’s Nine Network on Nov. 30.
Roy Hill Holdings Pty, developing a mine in the Pilbara, aims to be “one of the last people standing” as higher-cost suppliers close, Chief Executive Officer Barry Fitzgerald said on Nov. 20. As much as 130 million tons of seaborne capacity will have to shut over the next two years because of the supply glut, Goldman Sachs Group Inc. said last month.