World’s top iron ore shipper chops its outlook to 20%

Bloomberg

The world’s biggest iron ore shipper cut its outlook for prices next year by 20 percent as the global market remains well supplied, loss-making miners are holding out and steel output in China will shrink further.
Iron ore is seen at US$44.80 a metric ton next year, Australia’s Department of Industry, Innovation and Science said in a quarterly report. That compares with its previous forecast of US$56 given in the March quarter. The prediction for 2016 was little changed at US$44.20 a ton from US$45.
Prices were whipsawed in the first half after three years of declines, and remain 27 percent higher after construction in China picked up. Despite the large movements, fundamentals are broadly unchanged, according to the department, which forecast that while the nation’s shipments will increase further, earnings would be flat. Data from China showed another rise in port holdings, which expanded to the highest since December 2014.
“Given the plans by some miners to increase supply, the glut will probably expand this year,” Xu Ke, an analyst at Huatai Futures Co in Shanghai, said .
“The revised iron ore outlook is reasonable as China’s steel industry is undergoing reforms, so demand for raw materials should shrink markedly.”
Price projections by the department refer to spot ore with 62 percent content free-on-board Australia. The commodity delivered to Qingdao was at US$55.17 a dry ton, according to Metal Bulletin Ltd. Prices swung from a low of US$38.30 in December to US$70.46 in April, the highest since January 2015.
Rising port holdings in China point to ample supplies. The inventories expanded 1.9 percent to 104.5 million tons this week, according to Shanghai Steelhome Information Technology Co. That’s the fourth weekly increase in a row, and the biggest gain since the week to April 1.
“With the expectation of weak growth in consumption and stronger growth in supply, prices are forecast to moderate over the remainder of 2016,” the department said.
“The revision is based on the assumption that loss-making operations may continue to produce for longer than previously expected.”
Iron ore may average about US$35 a ton through the remainder of the year and in 2017, S&P Global Ratings said as it lowered the outlook on Australia’s AAA credit rating to negative from stable. Australia’s government had forecast in a May budget an average price through 2017 of about US$55.
Australia’s largest operations are low-cost and are expected to remain competitive at prices below US$50 next year, the department said. Production from Rio Tinto Group, BHP Billiton Ltd., Fortescue Metals Group Ltd. and new entrant Roy Hill Holdings Pty will represent a combined 92 percent of the country’s production in 2016–17, according to the department.
Cargoes from Australia may increase from 818 million tons this year to 874 million tons in 2017, while Brazilian exports will also expand, the department estimates. The two countries are the top shippers. Still, given the price outlook, Australian earnings from exports will ease to A$48.85 billion (US$36.7 billion) in 2016-17 from from A$49.14 billion in 2015-16, the department said.
As authorities in China remain committed to steering the economy away from credit-fueled growth, Australia expects steel output in the largest producer to drop this year and in 2017. China will produce 783 million tons of the alloy in 2016 and 763 million next year, the department estimates.
“The rebound seen in China’s demand this year can best be described as the last ray of the setting sun,” said Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen. “Steel is like a human’s bones: you use it more when you’re younger, similar to the early stages of economic growth. Now, China’s economy has aged.”