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Iron ore will probably find a floor at $90 a tonne as surging seaborne supplies, which drove prices to a 20-month low in May, start to level off in the second half, according to Citigroup Inc.
Prices at $90 may put more than a quarter of Chinese capacity out of business and spur production cuts at mines outside the country, the biggest user, analyst Ivan Szpakowski in Shanghai said in a report today.
That should prevent a sustained decline below $90 for the rest of 2014, he said, reiterating a $100 average forecast for the fourth quarter. Iron ore entered a bear market in March and fell below $100 last month for the first time since 2012 as top miners including Rio Tinto Ltd. and BHP Billiton Ltd. expanded output, betting that rising exports to China would more than offset lower prices.
Producers in China face a rising challenge of cheaper supplies from Australia and Brazil that are spurring a global glut and hurting prices, according to Goldman Sachs Group Inc. and Australia and New Zealand Banking Group Ltd.
"This surge in supply is peaking in the second quarter and the second half of the year should see a leveling off," Szpakowski wrote, referring to shipments. "Prices sustained at $90 would lead to significant production curtailments." Ore with 62 per cent iron content delivered to Tianjin traded at $94.30 a dry tonne yesterday, plunging 30 percent this year, data compiled by The Steel Index Ltd. show. Prices may average $90 in 2015 and $80 in 2016, Citigroup said today.
The worldwide seaborne surplus will increase to 79 million tonnes this year and 158 million tons in 2015 from last year's 1 million tonnes, according to Morgan Stanley. Shipments to China from Australia's Port Hedland, the world's largest bulk export terminal, expanded 36 per cent to 130.5 million tonnes in the first five months of 2014, data from the port authority showed.
Banks from Goldman Sachs to ANZ forecast last week a shakeout of Chinese mines as the surplus expands and prices retreat. As much as 100 million tonnes of Chinese production capacity could close this year, ANZ estimates.
"We'll have to wait for prices of imported iron ore to drop to $85 or lower before seeing the closure of Chinese mines," Helen Lau, an analyst at UOB Kay Hian Ltd. in Hong Kong said by phone. The lower costs of storing and transporting local ore make up for its price gap with seaborne ore, she said.
Strike Threat Domestic ore in China costs about $75 to $145 a ton to produce, more than twice as much as foreign supply, the National Development & Reform Commission said May 28. The difference between the price in China and the global rate was $19.03 yesterday, the lowest since April 29, according to data compiled by Bloomberg.
A wider gap makes imports more attractive. Iron ore futures on the Dalian Commodity Exchange fell 0.6 per cent to 686 yuan a tonne today and slumped 25 per cent in 2014. Engineers at Port Hedland joined tugboat officers and deckhands today in approving work stoppages, threatening to slow iron ore exports by companies including Fortescue Metals Group Ltd. and BHP, which estimated that disruption may cost suppliers about A$100 million ($94 million) a day.
