Iron Ore Outlook Cut by JPMorgan as BHP, Rio Shares Extend Slump

By Jasmine Ng  Dec 9, 2014
Bloomberg
Iron ore prices will extend declines as growth in low-cost supply from the world’s largest producers outstrips demand, according to JPMorgan Chase & Co., which cut forecasts through 2017. Mining companies’ shares sank.

The steel-making raw material will average $67 a metric ton next year, 24 percent less than previously forecast, and $65 in 2016, down 23 percent, the bank said in an e-mailed report received today. So far this year, it’s averaged $98.82 a ton, according to data from Metal Bulletin Ltd. In 2017, prices will average $69 a ton, 16 percent less, the bank said.

Iron ore is heading for the biggest annual loss in at least five years as Rio Tinto (RIO) Group, BHP Billiton Ltd. (BHP) and Vale SA (VALE5) expanded output, spurring a glut just as growth slowed in China. The larger miners are choosing to overproduce, driving prices lower and forcing the closure of higher-cost suppliers, according to Bank of America Merrill Lynch. The raw material may drop to less than $60 next year, Citigroup Inc. estimates.

“The only way the oversupply can be averted is if the low-cost producers cut back on their growth targets,” JPMorgan said in the report, which was dated Dec. 7. “This is unlikely: feedback from recent site visits to the Pilbara suggests there is currently no consideration for slowing capacity growth from either Rio Tinto or BHP Billiton.”

BHP Retreats

Ore with 62 percent content delivered to Qingdao, China, lost 1.1 percent to $69.06 a dry metric ton today, according to data from Metal Bulletin. Prices slumped to $68.49 on Nov. 26, the lowest level in more than five years, and lost 49 percent this year.

BHP lost as much as 3.3 percent to 1,390 pence, the lowest level in London since July 2009, and was at 1,404.50 at 12:03 p.m. local time. The world’s biggest mining company, which also produces oil, is 25 percent lower this year as iron ore and crude fell. Rio stock retreated as much as 3.2 percent in London, dropping for a fourth straight day.

Global seaborne output will exceed demand by 100 million tons this year from 16 million tons in 2013, according to HSBC Holdings Plc. The price will average $99 this year and $85 in 2015, the bank predicts.

“The majors have embarked on ‘shakeout’ in the iron ore market with a view to regaining market share,” Bank of America Merrill Lynch said in a report on Dec. 3. The price will average $70 next year and $65 in 2016, it said, cutting forecasts.

No Slowdown

BHP signaled that there won’t be a slowdown in the drive by global producers to boost output. If the higher “volume doesn’t come from our business, it’s going to come from other businesses,” Jimmy Wilson, BHP’s president of iron ore, said in an interview broadcast by Australia’s Nine Network on Nov. 30.

Prices will return to an average $85 to $90 next year as high-cost mines shut and Asian demand rises, Vale Chief Executive Officer Murilo Ferreira said last month. Australia’s Roy Hill Holdings Pty, developing a mine in the Pilbara, aims to be “one of the last people standing” as higher-cost suppliers close, Chief Executive Officer Barry Fitzgerald said on Nov. 20.

An additional 341 million tons of capacity will be added over the next five years by Rio, Vale, BHP, Fortescue and Hancock Prospecting Pty, the owner of Roy Hill, JPMorgan estimated. Hancock’s Roy Hill project breaks even at $60 to $70 a ton and will proceed despite weak prices, the bank said.

The economy in China, which buys 67 percent of seaborne supply, is on track to record its weakest annual growth since 1990. The central bank cut interest rates last month for the first time since 2012 and HSBC and Barclays Plc predict there will be another two cuts before the middle of next year.

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