Iron Ore Prices Buckling Again As Supply Surges, China Demand Falters

By Jasmine Ng at Bloomberg

Iron ore is showing signs of buckling again. Prices slumped to the lowest level in three months as the top producers announced increases in low-cost supply while data and comments from China pointed to further weakness in demand.

“All of this extra production out of ‘the big three’ will keep a lid on prices,” said Gavin Wendt, founding director and senior resource analyst at MineLife Pty Ltd. in Sydney. “China demand remains tepid and its steel industry is hurting under margin pressures.”

Iron ore is headed for a third year of losses, and the recent decline risks tugging prices below the trading range of $50 to $60 a metric ton that’s held since July, according to Westpac Banking Corp. Rio Tinto Group, BHP Billiton Ltd. and Vale SA, the three largest suppliers, all announced increases in quarterly output this month. China’s central bank on Friday cut benchmark rates and banks’ reserve requirements to boost a faltering economy after data this week showed crude-steel output contracted. The chairman of the second-largest producer flagged the potential for the country’s production to eventually slump 20 percent.

Weak Steel

“The downtrend in seaborne iron ore prices is accelerating,” according to a report from Australia & New Zealand Banking Group Ltd. on Friday. “Chinese steel mills are tightening their spending on the back of weak steel prices.”

Ore with 62 percent content delivered to Qingdao slid 1.1 percent to $51.62 a dry ton on Friday, dropping for a fifth day to the lowest since July 24, according to Metal Bulletin Ltd. Prices are 4 percent lower this week, having dropped for five of the past six weeks. The raw material bottomed at $44.59 on July 8, a record in daily price data dating back to May 2009.

BHP, the world’s biggest miner, said on Wednesday iron ore output jumped 7 percent to 61.3 million tons in the three months to Sept. 30, two days after Brazil’s Vale said it produced a record 88.2 million tons in the period. In mid-October, Rio reported third-quarter output rose 12 percent.

Vale reported a 15 percent drop in adjusted quarterly earnings before interest, taxes, depreciation and amortization on Thursday as slumping prices overshadowed efforts to focus on higher-quality deposits and cut costs. Prices for iron ore fell in line with lower global steel output, with China’s steel usage subdued by real-estate weakness, Vale said.

Cost Curve

While demand in China may be static, the majors are in a comfortable position as they are able to sell all of the ore that they currently produce, according to Wendt. BHP, Rio and Vale are at the bottom-end of the cost curve, he said.

Crude-steel output in China, which accounts for half of global production, shrank 3 percent to 66.12 million tons last month as domestic demand fell, data showed Monday. Shanghai Baosteel Group Corp. Chairman Xu Lejiang said Wednesday that nationwide output may eventually contract by a fifth, matching the experience seen in the U.S. and Europe.

Prices may drop as low as $45 a ton by year-end, according to Justin Smirk, Westpac’s senior economist in Sydney, while Citigroup Inc. has forecast a decline below $40 in the first half of 2016. Prestige Economics LLC predicted a range of $58 and $68 next year as China cuts interest rates further.

The People’s Bank of China said Friday it would lower its benchmark lending rate and reserve requirements for banks, stepping up efforts to cushion a deepening economic slowdown that threatens the government’s growth target of about 7 percent this year. The changes take effect on Saturday.

Source: Iron Ore Is Buckling Again as Supply Jumps, China Demand Sags - Bloomberg Business

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access