BHP CEO says 'more bearish' on iron ore as price surge reverses

[MELBOURNE] Iron ore dropped for a sixth day, erasing gains from a record spike, as BHP Billiton Ltd said it was more bearish on prices than for any other raw material it produces and Morgan Stanley cut its forecasts.

Prices have declined every day after a 19 per cent surge to US$63.74 a dry metric ton on March 7, the biggest one-day advance for daily prices going back to 2009 compiled by Metal Bulletin Ltd. Ore with 62 per cent content delivered to Qingdao fell 4.8 per cent to US$52.88 on Tuesday, according to the data.

While iron ore's rally in 2016 has surprised many forecasters expecting a fourth year of losses, the current retracement signals that the same factors which dragged prices to a six-year low in December remain at the forefront. Demand growth in China is stalling as steel production continues to shrink amid a widening global glut.

"We are relatively bearish about the iron ore price, probably more bearish about the iron ore price than the price of any other commodity that is currently part of the BHP Billiton portfolio," Chief Executive Officer Andrew Mackenzie said Wednesday in Melbourne. The producer also has copper, petroleum and coal assets.

Morgan Stanley lowered its forecast for benchmark prices by 14 per cent to US$40 a ton for 2016 and by 17 per cent to US$37 a ton in 2017, according to a March 15 note. The bank sees prices remaining in a stable trading range until the third quarter "buoyed by spring-summer's more active steel trade, then decline on a seasonal pullback," it said. The bank cut its third-quarter estimate by 29 per cent to US$32 a ton and its fourth-quarter by 25 per cent to US$30 a ton.

Demand is continuing to wane while new supply is being added to the export market, according to BHP's Mr Mackenzie. "Ultimately that excess of supply will drive prices lower than where they are currently."

China's crude-steel production for the January-to-February period dropped 5.7 per cent to 121.1 million tons from a year earlier, according to data published by the statistics bureau on March 12. Annual output shrank 2.3 per cent to 804 million tons in 2015, the first contraction since 1981, the data showed.

Prices are likely to retreat as exports from the top producers pick up, which typically happens in the second quarter, said Jeremy Sussman, an analyst at Clarksons Platou Securities Inc in New York. "We are heading back down to much lower levels."

Still, iron ore prices have climbed this year as weather-related disruption to Australian shipments tightened supplies and steel mills stepped up production after February's Lunar New Year break. Chinese policy makers have signaled willingness to buttress economic growth, boosting the outlook for steel consumption in the top user and igniting speculation that some investors who'd bet against the market had been caught out.

After last week's jump, banks joined some of the largest miners in predicting that the surge wasn't likely to endure. Goldman Sachs Group Inc said the rally will probably prove temporary and maintained an end-of-year target of US$35 a ton, while Citigroup Inc said it's still bearish.

Even at lower prices, cost cutting by producers in Australia, the top exporter, means they will continue to generate cash, according to Mr Mackenzie. "The iron ore business is still very profitable for us, and for Australia."

BLOOMBERG