(Minews) - Morgan Stanley, which began the year saying the worst was probably over for iron ore prices, cut forecasts for the raw material through 2017, citing weak conditions in China and a seaborne surplus that’ll more than double.
The steel-making commodity will average $57 a metric ton in 2015, 28 percent less than a previous forecast, analysts Tom Price and Joel Crane wrote in a quarterly report on Tuesday. The 2016 outlook was cut 13 percent to $65 and the 2017 forecast was reduced 5 percent to $71 a ton, according to the report.
Iron ore is headed for a record quarterly loss as slowing demand in China coupled with surging low-cost supply from Rio Tinto Group and BHP Billiton Ltd. spur a widening global glut. Premier Li Keqiang’s targeted gain of about 7 percent in gross domestic product this year would be the smallest increase since 1990, and a private gauge on Tuesday showed manufacturing contracting. Citigroup Inc. reiterated on Monday that it expected prices to drop below the $50 level.
“The apparent loss of investment confidence in China’s broader industry is exaggerating the bearish impact of Australia’s ongoing supply growth,” Price and Crane wrote. “With only months left before the mid-year peak in sales of commodity-intensive goods, time is running out for China to support commodity prices in 2015.”
Iron ore with 62 percent content at Qingdao sank 23 percent this quarter to $54.81 a dry ton on Monday, according to Metal Bulletin Ltd. That’s the biggest quarterly decline in daily price data going back to 2009. On Friday, the commodity retreated to $54.66, the lowest level since at least May 2008, when Metal Bulletin started compiling weekly prices.
Global Surplus
Morgan Stanley also reduced quarterly forecasts for this year by as much as 34 percent, predicting iron ore will average $63 a ton in the first three months, $55 in the second quarter, $50 in the third, and $60 between October and December. Seaborne supply will exceed demand by 129.3 million tons in 2017 from an estimated 55 million tons this year, it said.
BHP this month defended its strategy of boosting iron ore output at a time of falling prices and global oversupply, saying that cutting back would penalize its shareholders. Rio’s Sam Walsh said last month that if his company reduced output, forfeited supply would be made up by higher-cost competitors.
Rio Tinto shares declined 1.1 percent to 2,909 pence at 8:20 a.m. in London, while BHP lost 0.2 percent to 1,588 pence. In Sydney, Fortescue Metals Group Ltd. rose 1.5 percent, trimming this year’s slump to 27 percent.
Biggest ProducerAustralia, the world’s biggest exporter, said this month that iron ore may average $60 this year as supplies increase. China’s steel consumption growth will remain lackluster through 2015, while seaborne supply will expand 111 million tons, the Department of Industry and Science said on March 18.
China, which last year posted the slowest economic growth in more than two decades, has flagged increasing headwinds that include a property slump and excess industrial capacity. Steel production in the world’s largest producer will contract 0.5 percent this year, Morgan Stanley said.
“The trade’s being unsettled by an extraordinarily weak start to the seasonal expansion in activity for China’s steel sector,” Price and Crane said. “Numerous new mining operations that appeared this past decade are now uncommercial at current prices; many of these have already closed.”
The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics fell to an 11-month low of 49.2 in March, data showed on Tuesday. That missed the median estimate of 50.5 in a Bloomberg survey and is down from February’s 50.7. Numbers below 50 indicate contraction.
“Underlying demand has weakened further since late 2014,” HSBC said in a note on Tuesday. “We expect policy makers to deploy more easing measures to counter the downside risks to growth and inflation.”
