As China property flashes warning, Australia sees iron below US$50

[SINGAPORE] Iron ore will slump to trade below US$50 a metric ton next year as the biggest producers increase low-cost supply, according to Australia's government, which highlighted growing risks to demand as China's property market faces oversupply and a slowdown.

"The uptick in China's construction activity is unlikely to persist, and the use of commodities in the sector is forecast to decline," the Department of Industry, Innovation and Science said in a report on Friday. As global iron ore supply rises and building activity in China wanes, prices will drop to average US$44.80 a ton in 2017, according to the forecaster.

The projections from Australia cast doubt on expectations from miners including Brazil's Vale SA that the US$50 level will hold, and add to warnings about China's property market. Goldman Sachs Group Inc said this week it sees growing vulnerabilities in China's housing market after a steep run-up in sales and prices following government stimulus. Asia's top economy is the largest importer of iron ore.

'There Is Oversupply'

"Despite a modest drawdown in inventories in the first half of 2016, the residential property market remains oversupplied" in China, the department said in the report.

"The housing market has now matured and there is oversupply in the less desirable, smaller and inland cities."

Iron ore of 62 per cent content delivered to Qingdao was at US$55.86 a dry ton on Thursday, averaging about US$54 this year, according to Metal Bulletin Ltd.

The projections by the department refer to spot ore free-on-board from Australia. Its outlook for 2017 was unchanged from the figure given in July. It sees FOB prices this year at US$48.50, up from its prior outlook of US$44.20.

Iron ore has risen this year, snapping three annual declines, after China added stimulus to counter a slowdown, helping to sustain steel production as the property sector recovered. The construction industry accounts for more than 70 per cent of domestic steel use, according to the Australian department.

Exports from Australia may rise to 877 million tons in 2017 from 813 million tons this year, while Brazilian shipments will expand to 411 million tons from 389 million, the department said. Brazil's Vale is set to start a four-year rampup of its S11D project, which will add a net 75 million tons yearly, while in Australia, Gina Rinehart's Roy Hill is adding 55 million tons per annum.

Vale's View Iron ore will probably trade at US$50 to US$60 a ton next year, Peter Poppinga, head of ferrous minerals at Vale, told Bloomberg News last month. That's more optimistic than the outlook from banks including UBS Group AG and Citigroup Inc, which have forecast a slump next year as low-cost supply surges.

The period from November to December may mark a "death knell" for the commodity, UBS said this week, citing falling margins at steelmakers after coal jumped, and prospects for increased mine output. Citigroup has forecast that iron ore will drop to US$45 a ton next year and US$38 in 2018 on burgeoning supply.

"The iron ore price going forward will likely better reflect market fundamentals of slow consumption growth, and further growth in production volumes at low costs," the Australian department said.

"The iron ore price is forecast to decline later in 2016 and average 6 per cent lower in 2017."

BLOOMBERG