Iron giants to add 200 million tons of supply through 2020

[SINGAPORE] The world's two largest iron-ore exporters Australia and Brazil will each add about 100 million metric tons of supply through the end of the decade, boosting a global glut and hurting prices in a slump that will then force marginal miners to cut output, according to Citigroup Inc.

Shipments from Australia will expand to 934 million tons in 2020 from 835 million this year, while Brazilian cargoes rise to 480 million tons from 371 million, the bank said in a report.

That'll lift the surplus to 56 million tons in 2018 from 20 million this year, before price-induced curtailments help bring the global market back toward a balance, Citigroup estimates.

While iron ore has rallied in 2016, confounding predictions for renewed losses, investors are now refocusing on prospects for rising output from the top suppliers.

With Brazil's Vale SA set to start a four-year rampup of its S11D project, banks from Morgan Stanley to Citigroup as well as BHP Billiton Ltd have said the additional output will probably contribute to weaker prices.

The expansion of ore supply is on track, with restarted capacity a swing factor, Citigroup analysts including Ed Morse wrote in the report received on Monday.

"We expect iron ore prices to find some support in the next one to two months, but should face strong headwinds thereafter through 2017." The raw material with 62 per cent content delivered to Qingdao climbed 0.8 per cent to US$56.79 a dry ton on Friday, according to Metal Bulletin Ltd.

Prices are still 3.7 per cent lower in September, heading for their first back-to-back monthly decline since November 2015. Citigroup reiterated its outlook for ore dropping to US$45 next year and US$38 in 2018.

The global surplus will probably start to shrink after 2018, dropping from 56 millions that year to just 8 million tons in 2019, the bank forecast. It estimated price-induced curtailments would be about 150 million tons in 2018 and more than twice that figure in 2020.

SGX AsiaClear futures point to lower prices in the months ahead, with the contract for October trading at US$55.57 a ton, January's at US$50.60 and next September's below US$45.

Miners' shares fell on Monday, with BHP 0.3 per cent lower in Sydney, paring its 2016 gain to 20 per cent, as Rio Tinto Group and Fortescue Metals Group Ltd both fell. The trio are Australia's top shippers.

BLOOMBERG