Iron ore is expected to extend its decline into next year as a global glut more than doubles, said Australia & New Zealand Banking Group Ltd (ANZ), which reduced its price forecasts through 2017.
The raw material will average US$78 a tonne next year, from an earlier forecast of US$101, ANZ commodity research head Mark Pervan wrote in a report dated yesterday.
Pervan also cuts his forecasts to US$85 from US$95 for 2016, and to US$89 from US$94 for 2017.
While prices are not expected to drop below US$70, they are unlikely to recover to more than US$100 again, he said.
Iron ore plunged 44 percent this year to a five-year low as rising supplies from BHP Billiton Ltd and Rio Tinto Group in Australia created a glut amid a Chinese economic slowdown. The increase in low-cost global production would trigger permanent mine closures in China, creating a lower industry floor price, said Pervan, adding that he had just returned from a tour of mills and traders in the world’s largest steelmaker.
“The party’s over for iron ore,” Pervan wrote in the report, which forecast a global surplus next year of 56 million tonnes, up from 20 million tonnes this year. “Demand conditions are more challenging than we thought.”
Ore with 62 percent content delivered to Qingdao in China ended at US$75.84 a dry tonne on Friday for a 4.7 percent loss over the week, the biggest weekly drop since May, according to data from Metal Bulletin Ltd. The commodity traded at US$75.38 on Thursday, the lowest since September 2009.
Iron ore’s collapse prompted Macquarie Group Ltd to say in a September report that the market is in the midst of a transition without precedent in recent commodity history as supply jumps and higher-cost mines shut. The same month, Goldman Sachs Group Inc declared the “end of the Iron Age” after a Chinese-led demand surge over the past decade had brought record profits for producers.
“The super-high profits enjoyed by the iron ore sector over the past three to four years appear to be over,” Pervan said. “Big, low-cost producers now seem keener on bedding-down dominant market share in an increasingly challenging environment.”
The oversupply will not last forever as some smaller producers that started output when prices were much higher will not be able to survive the slump, said Rio de Janeiro-based Vale SA, the largest producer. Prices of US$90 to US$100 a tonne are sustainable over the long term, Claudio Alves, global director of ferrous marketing and sales, told reporters on Friday.
A recovery in prices may take as long as 18 months as the reaction of higher-cost mines to lower prices is not immediate, Paulo Castellari, chief executive officer of Anglo American PLC’s iron ore unit in Brazil, said in an interview on Nov. 3.
The market needs to absorb a surplus of about 110 million tonnes next year, almost double the estimated 60 million tonnes this year, Goldman said in a report on Oct. 23. Prices may average about US$80 a tonne next year, it said, maintaining its outlook.
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