Iron ore glut to overwhelm weak China demand: Goldman

Singapore

RISING seaborne iron ore supplies over the next two quarters will probably overwhelm weak demand from mills in China, according to Goldman Sachs Group Inc, which said that a global glut was entering its second year.

While housing starts in China have recovered and infrastructure has overtaken property to become the largest market for steel, an improvement this half may not be strong enough to support iron ore, the bank said in a report.

Prices are seen dropping over the next four quarters, from US$49 a tonne through September to US$44 by the April-to-June period of 2016, according to analysts Christian Lelong and Amber Cai.

Iron ore sank to the lowest level since 2009 this month amid concern that the world's biggest mining companies including Rio Tinto Group, BHP Billiton Ltd and Vale SA are intent on boosting low-cost supply even as demand falters. Imports by China shrank in the first six months of the year, while local mills sold a record amount of production overseas. BHP is set to report quarterly production data on Wednesday.

"We expect seaborne supply to increase sequentially over the next two quarters and to gradually overwhelm the weak demand from Chinese steel mills," the analysts wrote in the July 20 report. "The next phase of rebalancing the iron ore market will play out primarily among marginal seaborne producers."

Iron ore with 62 per cent content delivered to Qingdao rose 3.4 per cent to US$52.39 a dry tonne on Monday, the highest since July 3, according to Metal Bulletin Ltd. The price sank to US$44.59 on July 8, the lowest for data going back to May 2009, and is 26 per cent lower this year.

In Sydney, stock in Rio dropped 1.4 per cent to A$53.12 at 12.55pm local time, while shares in BHP declined 1.1 per cent and Fortescue Metals Group Ltd gained one per cent. The companies are Australia's top three exporters.

Goldman's team recently met in China with several banks, developers and producers in the steel, mining and building-materials industries to gauge the outlook, according to the report. While there was a widely held view steel demand would improve in the second half, any pickup may not be strong enough to support iron ore as seaborne supply gains, the bank said.

Australian shipments will expand to 785 million tonnes in 2016 from 764 million tonnes this year, while Brazilian exports will rise to 411 million tonnes from 367 million tonnes, the bank forecast. Global iron ore demand will shrink 1.3 per cent this year, before expanding 1.1 per cent in 2016, it said. BLOOMBERG