Tags: goldman sachs | iron ore | supply | growth

Goldman Sees Iron Ore Rout in 2015 as Supply Growth Quickens

Wednesday, 06 August 2014 07:25 AM

Iron ore will extend a drop through 2015 when an increase in seaborne supply that’s spurred a global glut is set to accelerate, said Goldman Sachs Group Inc.

While the expansion in supply will probably moderate in the second half of 2014, the trend rate of growth in seaborne supply exceeds demand by a ratio of three to one, the bank said in a report dated Wednesday. Goldman kept its forecast for the steelmaking raw material at an average of $80 a metric ton in 2015 from $106 this year.

Prices have tumbled 29 percent in 2014 as companies from Rio Tinto Group to BHP Billiton Ltd. increased output, betting higher volumes will more than offset falling prices. Deutsche Bank AG and Morgan Stanley see lower rates through 2016. Fortescue Metals Group Ltd. has said it’s completed a $9.2 billion expansion to boost annual output to 155 million tons.

“The shift to oversupply started barely six months ago and the adjustment phase is far from over,” said Goldman analysts Christian Lelong and Amber Cai. “Seaborne supply is set to accelerate again in 2015 while Chinese steel production growth slows further.”

Ore with 62 percent content delivered to Tianjin rose 0.1 percent to $95.50 a dry ton Tuesday, according to data from The Steel Index Ltd. Prices entered a bear market in March and dropped to $89 on June 16, the lowest level since September 2012. China buys 67 percent of global seaborne supply.

Labor Dispute

While mining companies plan to boost shipments, a labor dispute over leave and wages threatens to disrupt cargoes at Australia’s Port Hedland, the world’s largest bulk terminal. Tugboat engineers intend to strike for four hours each on Aug. 9, Aug. 11 and Aug. 13, says Teekay Shipping (Australia) Pty, which is contracted by BHP Billiton Ltd. to tow vessels.

The action would mean that “half of the day’s shipping is lost,” Ian Roper, a Singapore-based analyst at CLSA Ltd., said by phone, estimating the strike would disrupt about 2.2 million tons of supply. “That’s not a great amount. Fundamental wise, there’s still an awful lot of supply.”

Fortescue and BHP estimate such a disruption may cost users about $93 million a day. Port Hedland shipments made up 55 percent of Australia’s total ore exports last year and about a quarter of global seaborne trade, Bloomberg calculations based on Bureau of Resources and Energy Economics data show. Iron ore is the country’s biggest export earner.

High Tide

Given the short duration of the stoppages and the glut, the strike will probably not materially impact the seaborne market or prices, Morgan Stanley said in a report today. If conducted at high tide, each four-hour stoppage could affect as much as 500,000 tons, or 1.5 percent of monthly volumes, analysts including Joel Crane said.

The outlook from Goldman contrasts with the view from Westpac Banking Corp.’s senior economist Justin Smirk, who said prices will rally and peak at $123 in the second quarter.

“We are likely to see softer near-term growth in ore supply overall as Chinese and other sources of ore moderate production,” Smirk wrote in a report today. “Any near-term upside surprise in demand will be a positive for prices.”

Iron ore rose in July for a second straight month on speculation that China’s demand for imports was improving, helping to absorb a global surplus as local supplies in the largest buyer are displaced.

Sanford C. Bernstein Ltd. predicted a dramatic recovery in prices in second half, saying that it’s now cheaper for steel mills in China to buy seaborne supply rather than domestic material. Citigroup Inc. said in June prices will rebound as the daily closure of mines supplying high-cost output in China boosts demand for seaborne shipments.

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Iron ore will extend a drop through 2015 when an increase in seaborne supply that's spurred a global glut is set to accelerate, said Goldman Sachs Group Inc.
goldman sachs, iron ore, supply, growth
Wednesday, 06 August 2014 07:25 AM
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