After Wild Ride, Iron Ore Becalmed as Citi Warns on Outlook

LAGOS (Capital Markets in Africa) – $60s may just persist for a while longer. Citigroup Inc. expects prices will probably hold in that range through to the third quarter, while cautioning the raw material may trend lower longer term as scrap usage rises and steel demand weakens in China.

The commodity will average $65 a ton this year, before easing to $60 in 2019, according to commodities strategist Tracy Liao. That compares with a year-to-date average of about $70.50 for benchmark material, according to Mysteel.com. Last year, it fetched about $71, although prices saw big moves over the 12 months.

After years of wild trading — with swings driven by rising output, speculation about China’s trajectory, and anti-pollution curbs — iron ore’s settled into a narrow $10 range for the past two months. That relative calm has come against a backdrop of China’s mills making unprecedented quantities of steel, and port stockpiles holding near record levels. Top miner Vale SA signalled this month its willingness to act as a swing producer, operating below capacity to prevent a damaging surplus, but willing to add supply if prices spike.

The forecast drop in prices will be “driven by a combination of tapering of Chinese steel demand and more substitution away from iron ore into scrap,” said Liao, who’s among speakers on Thursday in Singapore at Iron Ore Week, an annual event organized by Singapore Exchange Ltd. There’ll also be presentations from Vale, as well as BHP Billiton Ltd. and Rio Tinto Group.

Mills “tend to use more scrap because availability becomes better,” according to Liao, who said China is now nearing its “recycling age” as more cars are junked and buildings replaced. The environmental restrictions, especially winter curbs, bar mills from raising utilization from blast furnaces, so to maintain output “they tend to use more scrap,” she said in an interview.

Spot ore with 62 percent content fell 1 percent to $63.50 a ton on Wednesday, taking losses this year to 15 percent, according to Mysteel. While the commodity’s been in the $60s since March 16, benchmark prices have weakened in recent days. Earlier, SGX’s AsiaClear futures dropped for a seventh day as coal and steel retreated.

Vale Chief Executive Officer Fabio Schvartsman told Bloomberg last week the miner’s keeping tons in the ground to prevent a glut, but is prepared to unleash spare capacity if prices head toward $100. The conference will hear from Rogerio Tavares Nogueira, Vale’s marketing head for iron ore and coal.

Others are more bullish than Citi. Prices will average $66 this year and remain “comfortably above” $60 long term, according to Wood Mackenzie Ltd. Earlier this month, Australia & New Zealand Banking Group Ltd. said prices may push back toward $69 over the next few months on constructive steel demand.

While Citigroup remains bearish on iron ore, its price floor appears to be rising, according to Liao, citing supply-side disruptions. These include the suspension of operations at Anglo American Plc’s Minas-Rio operation in Brazil for the rest of the year, and consolidation of mines in China.

Source: Bloomberg Business News