Top Iron Ore Shipper Cuts Outlook as Price Seen Back in $50s

LAGOS (Capital Markets in Africa) – The world’s largest iron ore shipper has cut its outlook for prices this year, predicting the commodity will sink back into the $50s a metric ton as supplies rise while top buyer China starts to reduce purchases.

The raw material will average $59.40 a ton this year, down from an earlier forecast of $61.80, and then drop to $51.10 in 2019 and $51 in 2020, Australia’s Department of Industry, Innovation & Science said in a Monday report. That’s expected to cut the value of Australia’s exports to A$55.4 billion ($41 billion) in 2019-20 from A$61.8 billion in 2017-18 even as volumes grow.

Since dropping into a bear market in March, iron ore’s been locked in a narrow range in the $60s for the past three months against a backdrop of elevated port stockpiles and record steel production in China, according to official mainland data. The calm in prices has come after Asia’s top economy prioritized an anti-pollution drive by restraining some mill supply in winter, benefiting higher-quality ore. At the same time, top miners added output at new projects, although there’ve been supply glitches in Brazil and Canada.

Prices are expected to drop “as a result of moderating demand and growing supply, particularly from Brazil,” the department said. “China’s iron ore imports are forecast to gradually decline at an average annual rate of 0.6 percent over the outlook period, to reach 1.07 billion tons in 2020.”

Spot ore with 62 percent content in China was at $64.45 on Friday, 12 percent lower this year, according to Mysteel.com. The forecasts from Australia are for free-on-board prices. On Monday, SGX AsiaClear futures retreated 0.7 percent, while the Dalian Commodity Exchange contract fell 2.3 percent.

Exports from Australia and Brazil, the world’s leading shippers, are projected to expand from a combined 1.26 billion tons this year, to 1.31 billion next year and 1.33 billion in 2020, according to the report. Over the same period, China’s imports will ease 25 million tons to 1.07 billion tons, it said.

Australia is “expected to contribute to export growth over the short term as Rio Tinto and BHP continue to ramp up toward record production levels,” the department said, referring to Rio Tinto Group and BHP Billiton Ltd. In Brazil, rival Vale SA is bringing on its S11D project, it said.

The market has seen a major shift over the past two years as China’s anti-pollution drive spurs demand for cleaner ore, exploding the spreads between top-quality material and lower-grade cargoes. While that gap is now expected to shrink, it won’t return to its former range, the department said.

The spread is expected to narrow as steel production rises, weighing on steel prices and profit margins and reducing incentives to purchase more expensive, higher-grade ores, it said. Nevertheless, with the ongoing push in China to improve air quality, the gap is not expected to return to historical levels.

Source: Bloomberg Business News