Iron ore prices, heading for a second straight quarterly loss, will rebound as the daily closure of mines supplying high-cost output in China boosts demand for seaborne shipments, according to Citigroup Inc.
Local suppliers in Asia’s largest economy are cutting production even as mills increase steel output on improved margins, according to analyst Ivan Szpakowski. An iron ore mine in China is being shuttered every day, with closures seen in all main producing regions, he said in an interview from Shanghai.
Producers in China, the world’s largest user, face a rising challenge of lower-cost supplies from BHP Billiton Ltd. (BHP), Fortescue Metals Group Ltd. (FMG) and Vale SA (VALE5) after the biggest miners in Australia and Brazil expanded output and spurred a global glut. While benchmark prices in China are poised for the biggest three-month loss since 2012, they have risen in June and are heading for the first monthly advance since November.
“We’re one of the most bullish people in the market,” said Szpakowski, reiterating a forecast for prices to average $100 a ton in the fourth quarter and $104 this year. “Imported ore is much cheaper than domestic ore, so the shift in buying has moved to imported ore. That’s supporting imported prices.”
Ore with 62 percent iron content delivered to Tianjin fell 0.4 percent to $94.90 a dry ton on June 27, according to data from The Steel Index Ltd. So far this quarter, the commodity has lost 19 percent, following a 13 percent decline between January and March. Prices advanced 3 percent last week, the most since the period ended August 16.
Mine Shutdowns
“Supply in China has been decreasing,” Szpakowski said June 27, adding that there is robust support for the commodity at about $90 a ton, with prices unlikely to drop below that level. “Basically, every day there’s a new iron ore mine shutting down, so supply will continue to fall,” he said.
Between 20 percent and 30 percent of the iron ore mines in China have closed down, according to the China Metallurgical Mining Enterprise Association. Local production will decline 16 percent to 310 million tons this year and contract to 275 million tons in 2015, Credit Suisse Group AG said on June 23, citing projections for supply in 62 percent content terms.
Citigroup’s forecasts for landed prices in China compare with Goldman Sachs Group Inc.’s predictions for an average of $108 this year and drop to $80 a ton 2015, according to a June 17 report. Deutsche Bank AG sees iron ore averaging $104 in 2014, while Credit Suisse has projected $100 this year, with prices of $90 in the quarter from tomorrow and the final three months.
‘Justify Production’
“Chinese producers find it difficult to generate profits and justify production if prices stay below $100,” Gavin Wendt, founder and senior resource analyst at Mine Life Pty in Sydney, said in an interview today. Iron ore in Tianjin has been below that level since May 19, dropping to a low of $89 on June 16. “This in turn will provide some level of price support.”
The biggest closures of Chinese supply may be in Hebei as the province is the largest producer and has some of the highest costs, according to Goldman Sachs. As much as 100 million tons of capacity may close in China this year, according to Australia & New Zealand Banking Group Ltd.
Fortescue expects that prices will recover to about $110 a ton, Chief Financial Officer Stephen Pearce told the Australian newspaper in an interview, citing strengthening economic data in China and the decline of stockpiles at ports. The market has adjusted to increased supply from major producers, Pearce said.
Stockpiles at Chinese ports fell 0.9 percent to 112.65 million tons in the week to June 27 from a record 113.65 million tons a week earlier, according to Shanghai Steelhome Information Technology Co. Inventories have expanded 30 percent this year.
“Every significant ore-producing province has mines shutting down,” said Szpakowski. “We think prices will continue to go up.”
Source: Bloomberg