13/06/14 – Iron ore miners stare at uncertainty as capacity outnumbers demand globally
Glossy talks about exponential expansion in iron ore capacity indulged by global miners seems hollow faced with the unbeatable truth of global iron ore supply fast outpacing demand by miles. Even though miners in self-consoling mode stuck there necks out at an imminent turn of fortunes in the Chinese steel industry they cannot be blind to the changed dynamics.
Chinese growth story fades into oblivion with economic growth estimates plummeting 23 years low of 7.3% in 2014. Largely investment driven Chinese economy seems to survive more on government stimulus and speculative vicissitudes emanating from policy expectations rather than concrete action. Apart from demand slump in key consuming sectors viz., housing, infrastructure and construction crackdown on polluting steel capacities has reduced the propensity for growth in demand for finished as well as iron ore.
Glance through the crude steel production forecast for 2014 and 2015 reveals that while production will grow by 50 million tonnes and 53 million tonnes the iron ore needs demand will increase by meager 80 million tonnes and 85 million tonnes respectively.
|Iron Ore Need||80||85|
|(In million tonnes)|
Source – Worldsteel Forecast
The startling revelation magnifies the horror of deluge staring at the global iron ore miners. The capacity addition during this period will cross 175 million tonnes in 2015, compared with a prior prediction of 145 million tonnes. According to estimates output will exceed demand by 72 million tonnes.
Global miners, including BHP, Anglo-Australian rival Rio Tinto and Brazil’s Vale, have all banked on a sustained increase in iron ore demand from China, ramping up capacity and boosting available seaborne supplies. BHP is on track to raise its total annual production to 260-270 million tonnes, up from a planned 217 million tonnes in 2014. Vale and Rio Tinto have added up huge capacities too.
Iron ore price has slumped by 30% this year and is unlikely to pick-up soon. The market is no longer in balance but in the early stage of a structural surplus and China is unlikely to act as safety valve.
Plummeting price levels have forced local steel mills to turn to higher quality material from Australia at the expense of high cost poor-grade supplies from domestic mines.
Chinese imports of iron ore have surged 20.65 percent in the first four months of the year to 305.3 million tonnes, and Australian producers have been the main beneficiary, with shipments up 35.4 percent.
Iron ore will probably find a floor at USD 90 per tonne has the fall has stopped for at USD 92 per tonne yesterday. It is expected that at this level more than a quarter of Chinese mining capacity will go out of business and spur production cuts at mines in Australia and Brazil as well. H2 would see leveling of prices at USD 100 per tonne before decline resumes in Q1 2015.
Overall supply outpaces demand by yawning gap.
Source – Strategic Research Institute, Steel Guru