Iron ore mine closures around the world spurred by prices at a five-year low will help the raw material to level out even as Australia’s suppliers increase capacity further, the government forecaster in the largest exporter said one week before updating its global forecasts.
Supply cuts will start in high-cost seaborne producers followed by China, where some mines that close for the winter may not reopen next year, according to Wayne Calder, deputy executive director at the Canberra-based Bureau of Resources and Energy Economics. Iron ore may average $90 to $95 a ton over the next five years, he said in a phone interview yesterday.
Iron ore fell to the lowest since 2009 this month after Australian producers including Rio Tinto Group (RIO) expanded low-cost output, betting higher volumes would more than offset falling prices while less competitive mines were forced to close amid a global glut. The commodity may be heading for an end-of-year rally as some high-cost output is closed, according to Morgan Stanley. Global supply has run past demand growth, said Calder, whose agency will update its annual price forecasts next week.
“Price weakness will place significant pressure on China’s iron ore producers,” said Gavin Wendt, founder and senior resource analyst at Sydney-based Mine Life Pty. Falling grades and volatile prices are threatening to push them out of business, he said.
Iron ore with 62 percent content at the Chinese port of Qingdao lost 37 percent this year to $84.48 a dry ton yesterday, according to Metal Bulletin Ltd. Prices retreated to $82.22 on Sept. 10, the lowest level since September 2009.
Surging Demand
China is the largest importer as locally-mined supplies can’t fully meet the rising demand for the commodity needed for the steel to make girders, cars and appliances. The biggest economy in Asia buys more than 60 percent of global seaborne supply, and Australia and Brazil are the leading exporters.
“It helps prices level out,” said Calder, referring to potential mine closures that would curb output growth. “We’ll still see the price cycle and volatility in that, but if the higher-cost producers come out of the market it will reduce supply, so will give some stabilization to the price.”
While high-cost producers shut, expansions will further boost supplies from Australia, according to Calder. Production from Rio Tinto, BHP Billiton Ltd., Fortescue Metals Group Ltd. (FMG) and the Roy Hill mine will add about 100 million tons a year to the country’s exports, he said.
Goldman’s View
Iron ore’s drop came sooner than expected and prices are unlikely to recover, according to Goldman Sachs Group Inc. The global surplus will more than triple to 163 million tons in 2015 from 52 million tons this year, according to the bank.
Prices will average $105 a ton this year and $97 in 2015, the bureau forecast in June. The agency’s price forecasts refer to spot ore with 62 percent content free-on-board Australia. Shipments from Australia will jump 17 percent to 680 million tons this year and climb to 764 million tons next year, it said.
While iron ore will drop into the $70s-a-ton range in the near term, it will rally toward $90 a ton by the end of this year, Morgan Stanley analyst Joel Crane said in a report on Sept. 15. Enough supply from the costliest producers will be lost, boosting prices, he said.
Rio has a breakeven cost of $45 ton, BHP’s is $49, Roy Hill’s is $56 and Fortescue’s is $73, according to UBS AG, citing estimates for ore landed in China with 62 percent content. As much as 30 percent of coastal mines in China have shut, according to Wood Mackenzie Ltd.
“Mine closure decisions are difficult,” said Ric Spooner, chief strategist at CMC Markets in Sydney. “They involve considerable financial and human cost. Mines can’t be easily turned off and on again in response to short-term market fluctuations. My expectation is that we could start to see more closures if prices remain consistently below $80.”
Source:Bloomberg
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