Citigroup says top trade in commodity rout is short iron ore

[SINGAPORE] In a beaten-up commodities world with copper, gold and crude oil on the slide, Citigroup Inc said the best trade at present is to wager on further losses in iron ore.

"We've been generally bearish for the last two years, really, so still even today we probably see more opportunities for the downside than to the upside," said Ivan Szpakowski, the bank's commodity strategist in Hong Kong. "Our most-preferred trade at this point would be short iron ore."

Iron ore sank to the lowest since at least 2009 this month as the largest producers including Rio Tinto Group and BHP Billiton Ltd boosted output into an oversupplied market, seeking to expand sales and cut costs per ton. While Australia's Fortescue Metals Group Ltd said on Thursday that it's capping shipments, Brazil's Vale SA reported the second-highest quarterly output ever. Supplies will expand further while demand is weak, Mr Szpakowski said on Friday on Bloomberg Television.

"It's Vale, it's Rio Tinto, it's BHP as well as the ramp up now at Roy Hill," Mr Szpakowski said, referring to the mine backed by billionaire Gina Rinehart that's scheduled to start shipments this half. "That's the big supply increase we're facing. At the same time, the structural story for demand in terms of Chinese steel is quite weak."

Ore with 62 per cent content delivered to Qingdao slipped 0.6 per cent to US$51.42 a dry ton on Friday, according to Metal Bulletin Ltd. Prices dropped to US$44.59 on July 8, the lowest in at least six years, and are 28 per cent lower this year. While Mr Szpakowski didn't give a price target in the interview, the bank has forecast that prices will slump below US$40 this half.

Miners' shares were mixed in Sydney. Fortescue ended 0.9 per cent higher at A$1.66, rebounding from the lowest close since November 2008 on Thursday. BHP lost 0.9 per cent and Rio was unchanged. In London, Rio Tinto shares declined 0.4 per cent to 2,479 pence at 12:42 p.m. local time. BHP fell 1.5 per cent to 1,151 pence, its lowest in more than six years.

The Bloomberg Commodity Index traded at the lowest level since 2002 on Friday amid concern that supplies are exceeding demand. Crude oil in New York entered a bear market this week while copper in London fell to the lowest in six years. Gold was at the lowest since 2010 as investors expected the Federal Reserve to start raising interest rates this year, boosting the dollar.

"The market at this point is pricing a lot of that impact from the rate hike and dollar strength," said Mr Szpakowski. "We're neutral on gold at this point." Vale reported iron ore output rose 7.4 per cent to 85.3 million tons in the quarter to June 30, beating analysts' estimates. Fortescue said it wasn't planning further expansions after full-year shipments jumped about a third in fiscal 2015.

Iron ore exports from Australia will expand 10 per cent next year to 824 million tons, according to a forecast from the country's Department of Industry and Science. The shipments will be lifted by operations at Roy Hill in the ore-rich Pilbara.

BLOOMBERG