(Minews) - Iron ore may tumble into the $30s a metric ton in the second half as surging low-cost supplies from the world’s biggest producers swamp the market, expanding a glut, according to Capital Economics Ltd.
The surplus will become more evident in the next six months, Caroline Bain, senior commodities economist in London, said in an interview. Higher volumes from Australia and Brazil will spur the renewed slump even as stimulus spending in China boosts steel demand, Bain said, forecasting that the raw material will end the year at $45.
While iron ore is poised to cap the first quarterly climb since 2013 on Tuesday, Capital Economics’ outlook adds to bearish forecasts from Goldman Sachs Group Inc. to Citigroup Inc. that the advance won’t last. Prices rebounded from a decade-low in early April on falling stockpiles in the top user as imports missed expectations. China, which produces half the world’s steel, cut interest rates to a record low at the weekend to support growth and counter an equity-market slump.
“There will be a sharp move down in the second half, when people realize that the apparent shortage that they’ve seen in the second quarter was temporary,” Bain said on Friday. “There will be a renewed bounce of investor sentiment turning against iron ore. It could certainly go down below $40.”
Ore with 62 percent content delivered to Qingdao, which bottomed at $47.08 a dry ton on April 2, was at $62.01 on Friday, according to Metal Bulletin Ltd. While prices rallied 21 percent this quarter, they remain 13 percent lower this year. The last quarterly gain was in the final three months of 2013, when prices rose 2.5 percent before collapsing in 2014.
Higher-Cost MinesThis quarter’s rally will be temporary as disruptions to shipments have passed, according to Bain. Some higher-cost mines, which suspended output as prices tumbled before April, took the opportunity to resume operations, she said, citing the example of Australia’s fourth-largest shipper, Atlas Iron Ltd.
“The iron ore price is going to be volatile,” Atlas Managing Director David Flanagan said in an interview with Bloomberg Television’s ‘Trending Business’ on Monday, forecasting swings of $10 to $15. “We’re actually locking in our prices three and six months ahead. So if the price falls to $40 a ton, our business will be insulated.”
Global supply will exceed demand by 92 million tons this year and 78 million tons next year, according to Bain. The drop in prices in the second half will spur additional closures of less competitive miners, including in China, she said.
Goldman has warned iron ore will drop back below $50 as supplies increase. Citigroup sees prices slumping below $40 in the fourth quarter as Rio Tinto Group completes an expansion project and the Pilbara-based Roy Hill mine begins shipments.
“The spike up is quite a dangerous phenomenon because it’s given producers hope,” Bain said. “The underlying picture hasn’t changed, which is one of oversupply. I think producers will live to regret the price rebound.”
