(Minews) - A worsening mismatch between global iron ore supply and demand prompted JPMorgan Chase & Co. to reduce price forecasts through 2018 as data from China showed steel output in the world’s largest producer shrank in the first quarter.
The raw material will average $51 a metric ton this year, 20 percent less than previously forecast, the bank said in an e-mailed report on Wednesday. The 2016 outlook was cut 22 percent to $50 a ton, while predictions for 2017 and 2018 were reduced by 18 percent and 8 percent, respectively, it said.
Iron ore collapsed below $50 a ton this month as surging low-cost output from BHP Billiton Ltd. and Rio Tinto Group fed a surplus and demand in China faltered. Growth in Asia’s largest economy slowed in the first quarter to the weakest since 2009 as steel production fell, data on Wednesday showed. Australian Treasurer Joe Hockey said he plans to speak with China’s finance minister about demand for the country’s biggest export.
“Our analysts do not expect near-term production cuts from the majors, partly owing to fears of a loss of market share,” JPMorgan said. “Indeed, it is because of a projected aggressive supply expansion that prices are falling.”
Ore with 62 percent content at Qingdao rose to $50.78 a dry ton on Tuesday, the highest price this month, according to Metal Bulletin Ltd. It fell to $47.08 on April 2, the lowest since 2005, based on daily and weekly data from Metal Bulletin and annual benchmarks for ore delivered to China from Clarkson Plc. It’s 29 percent lower in 2015 after losing 47 percent last year.
No Floor
“What started the fall, which was essentially exactly a year ago, was a realization that supply was coming on much earlier than expected,” said Joel Crane, an analyst at Morgan Stanley in Melbourne. “Seaborne cargoes started increasing faster than people thought.”
The outlook for iron ore, used to make steel, is tied to China as local mills accounted for 51 percent of global steel output in February, according to the World Steel Association. The next biggest producer, Japan, accounted for 6.6 percent.
There’s no firm floor in sight for prices, HSBC Holdings Plc said in a report on Tuesday that pared its forecast for this year to $54 from $59. For miners, it’s a matter of survival of the fittest until some run out of cash, the bank said.
Global supply will increase 1.4 percent this year while consumption is seen unchanged, HSBC said. The demand environment has structurally changed as China moves from investment-led growth toward consumption-driven growth, it said.
Slower Growth
China’s gross domestic product rose 7 percent in the three months through March from a year earlier, the statistics bureau said in Beijing on Wednesday, matching the median estimate of economists in a Bloomberg survey of analysts. Crude-steel output fell 1.7 percent to 200.1 million tons in the first quarter.
Atlas Iron Ltd., Australia’s fourth-largest supplier, is suspending all operations this month in response to the slump in prices, the company said last week. Atlas had forecast output in the year through June of as much as 13 million tons.
“Smaller iron ore producers already have mothballed projects, but their output barely touches the sides relative to the output of the larger producers,” JPMorgan said. The global surplus will rise to 108 million tons next year from 74 million tons in 2015, according to HSBC.
Atlas, BC Iron Ltd. and other junior Australian miners are all burning cash as costs exceed prices and if the situation remains unchanged, they can keep going for only a limited period, Sanford C. Bernstein & Co. said on Wednesday. The majors have much lower costs, Bernstein said in a report.
‘Self-Inflicted’
“Is it a surprise that commodity prices have dropped with the sheer amount of supply that has come online?,” Mike Smith, chief executive officer of Australia & New Zealand Banking Group Ltd., said in a speech at Bloomberg’s Sydney office on Wednesday. “In many ways, this is sort of self-inflicted. There’ll be winner and losers in this sort of cycle.”
The slump in iron ore will probably mean weaker growth in Australia’s nominal gross domestic product and a materially worse budgetary position, JPMorgan said. Hockey, who’s in the U.S. to attend a meeting of Group of 20 finance ministers, said in an interview with the Australian Financial Review that $35 is a level he’s contemplating for the budget next month.
“We don’t control commodity prices but I think everyone has a responsibility to ensure that our supply to key markets is consistent, predictable, and reliable,” Hockey told reporters in New York. “When you have an iron ore price that has dropped as dramatically as it has in the last 12 to 18 months, we’ve got to build shock absorbers into our system to cope with it.”
