Iron ore is headed for the biggest quarterly loss since at least 2009 as surging low-cost supplies from Australia and Brazil swamp the global market, spurring a glut as demand from China slows.
Ore with 62 percent content at Qingdao, China, sank 26 percent since the start of the year, according to daily data from Metal Bulletin Ltd. The raw material retreated to $52.69 a dry metric ton on Monday. That’s the lowest since 2004-2005, based on data from Metal Bulletin and annual benchmarks compiled by Clarkson Plc, the world’s largest shipbroker.
The commodity will cap a fifth quarterly retreat on Tuesday after Rio Tinto Group and BHP Billiton Ltd. expanded supply, betting increased volumes would offset lower prices and force higher-cost miners to close. A proposal from Fortescue Metals Group Ltd. Chairman Andrew Forrest this month for major miners to cap output was rejected by competitors, including Rio. Data showing China is slowing further, with the biggest buyer set for the weakest expansion in a quarter century, deepened the rout.
“There’s a bit of a self-destructing behavior by the big miners,” Philip Kirchlechner, former head of marketing at Fortescue and former chief iron ore representative at Rio Tinto in Shanghai, said by phone on Monday. “They’re overproducing in the face of slowing demand conditions. And it’s hard to understand such behavior,” said Kirchlechner, director of Iron Ore Research Pty in Perth, Australia.
Citigroup’s Outlook
Iron ore’s plunge since January compares with the 4.8 percent drop in the Bloomberg Commodity Index and exceeds the decline posted by that gauge’s biggest loser, lean hogs. Prices will slump below $50, according to Citigroup Inc., while Australia & New Zealand Banking Group Ltd. said that it doesn’t rule out a breach of that level in the second quarter.
“Mr. Forrest probably does speak the truth, in our view: the Big Miners can influence prices, if they could somehow (legally) act together to restrict supply growth,” Morgan Stanley analyst Tom Price wrote in a note, referring to Fortescue, Rio, BHP and Brazil’s Vale SA. The four control about 70 percent of global seaborne trade, Price wrote.
The lowest price this quarter, posted yesterday, is the weakest in daily and weekly rates from Metal Bulletin starting in May 2008. The Clarkson data, which include the cost of delivery to China, cover annual benchmark prices back to 2004.
China set a growth target of about 7 percent this year, the lowest in more than 15 years, and flagged headwinds including a property slump. Zhou Xiaochuan, China’s central bank chief, said on Sunday while growth has tumbled a bit too much, there’s scope for policy makers to respond. On Monday, the People’s Bank of China lowered the down-payment requirement for second homes and the finance ministry exempted homeowners from a sales tax.
Peak Steel
Peak steel arrives in China this year as production and consumption will fall after 2015, according to Morgan Stanley, which cut its iron ore price forecasts on March 24. Production of the metal may shrink this year for the first time since the early 1980s, according to UBS Group AG.
In an effort to stimulate prices, Fortescue’s chairman this month called on the largest suppliers to work together to cap output. The proposal was dismissed as “hare-brained” by Rio’s Chief Executive Officer Sam Walsh, while Gina Rinehart, the billionaire developing the Roy Hill mine in Western Australia, affirmed plans for shipments to start later this year.
Rio plans output of 330 million tons this year from 295 million in 2014, while BHP has a target for 225 million tons this fiscal year from 204 million a year earlier. Top supplier Vale SA in Brazil expects to produce 340 million tons. Jimmy Wilson, head of BHP’s iron ore business, said on March 10 that cutting supply to boost prices would hurt its shareholders.
Rational Decision
It’s rational for the biggest iron ore miners to increase output to protect and grow market share, according to Tom Albanese, former chief executive at Rio. Still, the mining industry faces several tough years as China slows, Albanese, CEO at Vedanta Resources Plc, said in an interview on Sunday.
Miners’ shares diverged this quarter as iron ore fell. While Fortescue’s stock retreated 29 percent to A$1.95 in Sydney since the start of the year, Rio lost 1.9 percent to A$56.91 and BHP advanced 5.3 percent to A$30.93.
Seaborne supply will exceed demand by 215 million tons in 2018 from 45 million tons this year, UBS Group AG this month. The seaborne surplus will expand to 47 million tons this year from 3 million tons in 2014, before rising to 260 million tons by 2018, according to Goldman Sachs Group Inc.
“We’re structurally oversupplied,” Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at UBS’s wealth-management unit in Hong Kong, said in an interview on Tuesday. “Things do not look good, especially on the bulks side. Somebody probably needs to leave the game.”
Source: Bloomberg