Iron ore strayed well off-script in 2016 as a rally surprised the bears. Michael Zhu, former global sales director at Vale SA, says the commodity will probably face a tough year in 2017 as supply keeps on expanding while China’s steelmakers struggle to sustain output at current levels.
“I’m not optimistic that the iron ore price will keep going up,” Zhu, president of Hong Kong-based trader Millennia Resources Ltd., said in an interview, predicting that prices will probably trade between $50 and $60 for the rest of 2016. Next year will be challenging “because Chinese steel production, even if they try to keep at current levels, iron ore supply will be increasing,” he said.
Iron ore has soared in 2016 after three annual losses as leaders in China added stimulus and a credit-fueled property boom lifted demand, with steel production rising to a daily record in June. Even as the unexpected surge prompted banks from Morgan Stanley to Goldman Sachs Group Inc. to raise their price forecasts this year, they’ve also flagged prospects for increased supply. That includes additional output from Australian billionaire Gina Rinehart’s Roy Hill project and expansions by top exporter Vale in Brazil.
“There’ll be pressure in the next one to two years,” Zhu, who’s been in the industry for more than 30 years, including 12 at the Rio de Janeiro-based company, said by phone on Wednesday. “The supply is increasing, there’s no doubt about that. The Australians are increasing. In Brazil, Vale is going to have this new S11D.”
Heading Higher
Ore with 62 percent content delivered to Qingdao has risen 40 percent in 2016 to $60.87 a dry ton on Wednesday, according to Metal Bulletin Ltd. The benchmark, which peaked at more than $190 in 2011, has traded in a $15 range bounded by the upper $40s and lower $60s for the past three months.
The advance has spurred a rally in miners’ shares. Rio Tinto Group has added 11 percent in Sydney this year, while BHP Billiton Ltd. gained 17 percent and Fortescue Metals Group Ltd. more than doubled. In Brazil, Vale’s stock has surged 57 percent. Shares of the top four producers were routed last year as iron ore plummeted.
Vale will probably start supplying ore from its 90-million-ton a year S11D operation by year-end. The project may produce between 30 million and 40 million tons next year, Claudio Alves, global director of iron ore marketing and sales, said in May. Rinehart’s Roy Hill is ramping up this year.
BHP has also put the spotlight on supply. Chief Executive Officer Andrew Mackenzie said this week that there’s more risk for prices to the downside as the ramp up by low-cost producers was continuing. Still, iron ore would remain a very high-margin business, according to Mackenzie.
Source: Bloomberg