Iron ore will extend declines next year as a global glut more than doubles, according to Australia & New Zealand Banking Group Ltd., which reduced its price forecasts through 2017.
The raw material will average $78 a metric ton in 2015, from an earlier forecast of $101, Head of Commodity Research Mark Pervan wrote in a report dated Monday. The 2016 forecast was cut to $85 from $95 and the 2017 outlook was reduced to $89 from $94, Pervan wrote. While prices won’t drop below $70, they are unlikely to recover to more than $100 again, he said.
Iron ore plunged 44 percent this year to a five-year low as rising supplies from BHP Billiton Ltd. and Rio Tinto Group in Australia created a glut as China’s economy slowed. The increase in low-cost global production would trigger permanent mine closures in China, creating a lower industry floor price, according to Pervan, who said he’d just returned from a tour of mills and traders in the world’s largest steelmaker.
“The party’s over for iron ore,” Pervan wrote in the report, which forecast a global surplus next year of 56 million tons, up from 20 million tons this year. “Demand conditions are more challenging than we thought.”
Ore with 62 percent content delivered to Qingdao in China ended at $75.84 a dry metric ton on Nov. 7 for a 4.7 percent loss over the week, the biggest weekly drop since May, according to data from Metal Bulletin Ltd. The commodity traded at $75.38 on Nov. 6, the lowest since September 2009.
Iron ore’s collapse prompted Macquarie Group Ltd. to say in a September report that the market is in the midst of a transition without precedent in recent commodity history as supply jumps and higher-cost mines shut. The same month, Goldman Sachs Group Inc. declared the “end of the Iron Age” after a Chinese-led demand surge over the past decade had brought record profits for producers.
“The super-high profits enjoyed by the iron ore sector over the past three to four years appear to be over,” said Pervan. “Big, low-cost producers now seem keener on bedding- down dominant market share in an increasingly challenging environment.”
The oversupply won’t last forever as some smaller producers that started output when prices were much higher won’t be able to survive the slump, according to Rio de Janeiro-based Vale SA, the largest producer. Prices of $90 to $100 a ton are sustainable over the long term, Claudio Alves, global director of ferrous marketing and sales, told reporters on Nov. 7.
A recovery in prices may take as long as 18 months as the reaction of higher-cost mines to lower prices isn’t immediate, Paulo Castellari, chief executive officer of Anglo American Plc’s iron ore unit in Brazil, said in a Nov. 3 interview.
The market needs to absorb a surplus of about 110 million tons next year, almost double the 60 million tons in 2014, Goldman said in a report on Oct. 23. Prices may average about $80 a ton next year, it said, maintaining its outlook.
“Where previously we expected a material rebound rally off an oversold base, we are less convinced steel mills will return to restock,” Pervan said. In August, the bank had forecast iron ore may recover close to $100 a ton toward the year-end.
Prices probably won’t drop below $70 as that would shut as much as 20 percent or 300 million tons of global supply, sending the market into a substantial deficit, Pervan said.
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