03/03/2015 – Global Iron Ore Surplus Seen by World Bank Lasting Two Years

(Bloomberg) — If history is any guide the global glut in iron ore may persist for as long as two years, according to the World Bank, which forecasts that the steel-making raw material will average $75 a metric ton this year.

“From experience from earlier iron ore episodes as well as other metal markets, it takes about one to two years for either excess supplies to get back to normal levels or excess demand to be met by larger supplies,” John Baffes, a senior economist at the lender, said in an e-mail response to questions.

Iron ore tumbled 47 percent in 2014 and extended losses this year as surging low-cost supplies from producers including Rio Tinto Group and Fortescue Metals Group Ltd. outpaced demand growth in China, spurring the surplus. Morgan Stanley forecasts that the glut will rise through to at least 2018. China’s economy, which consumes about two-thirds of iron ore transported by sea, slowed last year to the weakest pace since 1990.

“Weak economic growth prospects in the global economy is the key reason behind the weakness of most industrial commodity prices, including iron ore,” said Baffes, who’s worked at the bank for more than two decades. China may grow 7.1 percent in 2015 down from about 7.4 percent in 2014, he said.

Ore with 62 percent content delivered to Qingdao, China, fell 0.9 percent to $62.24 a dry metric ton on Tuesday, according to data from Metal Bulletin Ltd. It sank on Feb. 9 to $61.20, the lowest on record dating back to May 2009.

The $75 forecast figure from Washington-based Baffes reiterated the lender’s view given in its quarterly Commodities Markets Outlook report in January. So far this year, it’s declined 13 percent and averaged $65.37 a ton in Qingdao.

Goldman’s View

The glut will surge to 437 million tons in 2018 from 44 million tons in 2013, Morgan Stanley said on Feb. 22. Global seaborne output will exceed demand by 47 million tons this year and 260 million tons by 2018, according to Goldman Sachs Group Inc., which predicts prices will average $66 this year.

Having spent about $120 billion since 2011 to expand capacity, output from the major producers is set to rise further. BHP Billiton Ltd. kept a target for 225 million tons this fiscal year from 204 million a year earlier. Rio plans output of 330 million tons this year from 295 million in 2014, while Vale SA in Brazil expects to produce 340 million tons.

‘Pressure Downwards’

Rio Tinto’s Chief Executive Officer Sam Walsh said last month if his company cut output after prices sank, forfeited supply would be made up by rivals with higher costs. BHP saw “a degree of pressure downwards” on prices and a rising surplus, Chief Executive Officer Andrew Mackenzie said in February.

China’s economy has been squeezed by a property slump and industrial overcapacity. The central bank cut interest rates for the second time in three months on Feb. 28 to shore up growth in the world’s largest steelmaker.

About 150 million tons of the world’s production isn’t competitive at current prices, Peter Poppinga, Vale’s executive director for ferrous mineral, said on Feb. 26. Cuts to high-cost production will come mainly from mines outside China, he said.

Prices will slide to the $50s for most of 2015, while declining costs lower or sustain profitability for most of the industry, according to Australia & New Zealand Banking Group Ltd., citing weaker oil prices and falling currencies. The glut will double to a record 85 million tons this year and remain near that level for the next two years, ANZ said on Feb. 11.

“Iron ore prices have fluctuated a little over $60 a ton so far this year, though there were some gains made the past couple of weeks on news of restocking by China,” said Baffes. Iron ore is “highly volatile, which is the case with most commodity prices,” he wrote.

Source – Bloomberg.com