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Iron ore bear Andy Xie predicts prices below US$40 by year-end

[SINGAPORE] Iron ore bear Andy Xie is sticking to his guns.

The price will drop below U$40 a metric ton before year-end, and trade in the US$30s in 2016 as demand in China sputters, according to Mr Xie, an independent economist who's predicted a collapse since at least 2012. Mills in China will cut output and high-cost iron ore miners will go under, he said in an interview.

"The steel industry is reaching a critical point," said Mr Xie, a former Asia-Pacific chief economist at Morgan Stanley. "They'll have to cut production," said Mr Xie, who forecast in February- when iron ore was in the US$60s - that prices would drop below US$40 this year. It ended at US$44.91 last week, the lowest since July.

Iron ore has been pummeled this year by rising low-cost supply from the biggest miners including BHP Billiton Ltd and Vale SA and weaker steel demand in China, where mills make about half global output. Goldman Sachs Group Inc said last week the market was oversupplied and flagged further losses. The four biggest producers, BHP, Vale, Rio Tinto Group and Fortescue Metals Group Ltd, still have costs below current prices, according to Mr Xie.

"The four of them, their production costs are all in the teens," he said by phone on Friday. "A lot of the marginal producers, the new guys, have to exit. I expect major bankruptcies in this industry. All these guys coming out to say 'It's not so bad, it's improving.' These guys are still hanging on. They're going to go under, you know. They'll go bust."

Ore with 62 per cent content delivered to Qingdao sank 6.7 per cent last week to post a sixth straight weekly loss, according to Metal Bulletin Ltd. The commodity - which tumbled to US$44.59 on July 8, a record in daily price data dating back to May 2009 - has dropped 37 per cent in 2015.

"We don't disagree with Andy Xie's short-term forecast that iron ore prices may dip below US$40 by year-end or by the Chinese New Year as demand falters while supply, at least from overseas miners, still rises," said Chen Yan, deputy general manager at Shanghai Steelhome Information Technology Co, which provides market data.

"But we think it's quite unlikely that prices will remain below US$40 for a prolonged period." 

The biggest miners are betting that higher production will enable them to cut costs and raise market share while less efficient producers get squeezed. BHP's Alan Chirgwin, vice president of marketing for iron ore, has forecast that prices will gradually deteriorate over the next few years before finding a level well below US$50.

Mills in China are battling sinking prices, oversupply and mounting losses as local consumption shrinks for the first time in a generation amid a slowdown in economic growth. Output fell 2.2 per cent to 675 million tons in the first 10 months, the statistics bureau said this month.  Steel output by China's mills will probably contract 3 per cent this year and 5 per cent in 2016, Mr Xie said. While many producers in China were actually bankrupt, there was reluctance among some lenders to declare that, as the banks would have recognise the bad loans, according to Mr Xie.

Miners' shares were mixed in Sydney on Monday. While BHP dropped 2.1 per cent and Rio retreated 1 per cent, Fortescue erased an early fall to end 4.3 per cent higher. The trio are the country's largest shippers.