Iron ore capped the biggest monthly loss since May as steel mills in China curtailed output before a national holiday and major producers added supply, signaling that the bear market that began last year has further to run.
Ore with 62 percent content delivered to Qingdao, China, dropped 1.7 percent to $62.21 a dry metric ton on Friday, the lowest price on record going back to May 2009, according to Metal Bulletin Ltd. The steel-making raw material slumped 13 percent in January, dropping for a third straight month.
Iron ore lost 47 percent in 2014 after Rio Tinto Group, BHP Billiton Ltd. and Vale SA raised low-cost output, spurring a glut just as China slowed. The market’s fundamentals will probably remain very weak this year and possibly into 2016, Moody’s Investors Service said on Thursday. Steel mills in China are starting shutdowns earlier than normal before the Lunar New Year break, which begins on Feb. 18, as sales remain poor, according to Australia & New Zealand Banking Group Ltd.
“My crystal ball says iron ore will remain low,” said Piet-Hein Ingen Housz, global head of metals at ABN Amro Bank NV. Demand in winter is usually lower than the rest of the year as steel mills cut output before the Lunar New Year, while the so-called big four miners are producing more than ever to gain market share and weed out smaller producers, he said.
Commodities may decline about 10 percent over the next three months, Goldman Sachs Group Inc. said in a Jan. 27 report. The bank pared its 2015 iron ore forecast to $66 a ton from $80 in a Jan. 23 note that followed similar downgrades from at least four other banks this month including Citigroup Inc. and UBS Group AG. ABN’s Ingen Housz said that while prices may rebound above $70, they were unlikely to climb to more than $80.
China Slows
China, the world’s largest iron ore consumer, expanded 7.4 percent last year, the slowest pace since 1990, according to the statistics bureau. Crude-steel production rose 0.9 percent in 2014 compared with 7.5 percent a year earlier, to post the weakest growth in data going back 24 years.
Steel mills are cutting output before the Lunar New Year, putting further pressure on prices, according to Vanessa Lau, a Hong Kong-based analyst at Sanford C. Bernstein & Co. Iron ore demand is unlikely to recover before the Lunar New Year holiday as steel sales remain weak, ANZ said in a Jan. 29 note.
That’s not stopping major low-cost producers from expanding amid expectations that they will remain profitable while less competitive suppliers are forced to curtail output or close. Rio plans to boost output to 330 million tons this year from 295 million tons in 2014, while BHP kept a target for 225 million tons in fiscal 2015 from 204 million tons a year earlier.
Fortescue’s Vow
Fortescue Metals Group Ltd. has no intention of reducing production, Chief Executive Officer Nev Power told reporters on a conference call on Thursday. Supply from China and from other non-China sources has been cut back in line with expansions of the low-cost output, Power said, adding that prices are now being driven more by speculators than fundamentals.
Prices remain vulnerable to the downside given the slowing growth rate in steel production and recent expansion in global iron ore capacity, Moody’s said as it cut ratings on Australia’s Atlas Iron Ltd. Ore may fall as low as $55 this year, Thiago Lofiego, an analyst with at of America Corp., said at a seminar in Rio de Janeiro on Thursday.
“If we see little growth in China’s steel demand and output this year, it is difficult to see increased iron ore sales,” said Helen Henton, director of commodities at Roubini Global Economics LLC. “However, it will be the more marginal, higher-cost producers that are pushed out, rather than the major producers, as the latter have drastically reduced their costs.”
Source: Bloomberg