Goldman joins banks cutting iron ore outlook on global glut

[SINGAPORE] First Citigroup Inc, then UBS Group AG, now Goldman Sachs Group Inc.

For iron ore, which plummeted 47 per cent in 2014, the cuts to price forecasts from global banks just keep coming in the opening weeks of the year.

The steel-making ingredient may average US$66 a metric ton this year from an earlier estimate of US$80, Goldman Sachs said in a report dated Jan 23. This is the first time the New York- based bank has reduced its 2015 prediction since March 2013, and it's at least the fifth bank this month to lower estimates, citing rising seaborne supplies and weaker demand growth from China, the biggest user.

The iron-ore surplus emerged last year after the largest miners including Rio Tinto Group, BHP Billiton Ltd and Vale SA invested billions of dollars to boost output and as China grew at the slowest pace in more than two decades. Cheaper energy costs and depreciating currencies may delay supply cuts needed to rebalance the market, causing prices to extend losses, said Citigroup and UBS, which pared estimates for the commodity by as much as 22 per cent.

"Significant overinvestment to date will ensure that the market is well supplied, while demand from the Chinese steel sector is maturing," Goldman analysts including Christian Lelong wrote in the report. "A painful war of attrition awaits" the iron ore industry as less competitive mines shut, the analysts said.

Ore with 62 per cent content delivered to Qingdao, China, declined 1.5 per cent to US$66.79 a dry ton on Thursday, the lowest level since 2009, according to Metal Bulletin Ltd. Prices are headed for a third consecutive weekly loss, the longest streak since November.

Citigroup reduced forecasts to US$58 in 2015 and US$62 next year, down from estimates of US$65 for both years, according to a report dated Jan 14. UBS sees the raw material averaging US$66 this year, 22 per cent less than previously forecast, and US$65 in 2016, down 21 per cent, and lists iron ore as its least-favoured metal, it said Jan 15.

Low-cost expansions will probably continue as major producers are still mining iron ore at a profit, Goldman said. This will expand the global seaborne surplus from 47 million tons this year to 260 million tons by 2018, the bank estimates.

Exporters from Australia are winning the battle for market share in China, accounting for 59 per cent of imports last year from 51 per cent in 2013, according to customs data on Friday. Brazil's share was 18 per cent from 19 per cent, while exports from the rest of the world fell to 23 per cent from 30 per cent.

Gripped by a property downturn and excess capacity, China's economy expanded 7.4 per cent last year at the slowest pace since 1990, data on Tuesday showed. Over the same period, crude-steel production expanded 0.9 per cent from 7.5 per cent the previous year, says China's National Bureau of Statistics. That was the weakest growth in data going back 24 years.

"The decade-long love affair between China and iron ore is cooling," Goldman said. "We consider China to be a mature market and import growth is bound to moderate in line with domestic steel consumption."

Balancing the market in the face of stronger supply growth and slowing demand will result in more closures among high-cost producers, which will last beyond 2016, according to the bank. That burden will fall mainly on less competitive seaborne miners as output cuts in China won't be sufficient, it said.

About 29 million tons of seaborne capacity this year and 101 million tons in 2016 will shutter, Goldman predicts. The marginal cost of seaborne production is set to drop 17 per cent to US$65 by next year, the bank said. Mines with operating costs above this level would be forced to close.

BLOOMBERG