Iron-ore hits the skids as miners, banks wrangle over supply

SINGAPORE – After a stellar run in 2016, iron-ore has hit a rough patch. The prospect of a slump below $50 a metric ton is now back in view after the longest losing streak in more than five months as investors, analysts and miners spar over the impact of additional low-cost supply.

The raw material with 62% content delivered to Qingdao lost 5.8% in the past seven sessions to $55.97 a dry ton, according to Metal Bulletin. That’s the longest run of daily declines since March, and has pegged back this year’s gain to 28% from as much as 62% in April.

Iron-ore has retreated in September, rekindling speculation that rising supply from mine ramp-ups and new projects may soon drag prices lower. While miners Vale and Cliffs Natural Resources contend that the impact of the new output won’t be severe as expected and see the $50 level holding, Citigroup and Westpac Banking have said that additional production will probably contribute to weaker prices.

“Prices appear to be responding to the potential for increased supply as we move into the fourth quarter,” said Ric Spooner, chief market analyst at CMC Markets in Sydney. “The risk looks to be to the downside now. It’s certainly possible we could see prices below $50 from here.”

WEEKLY LOSSES
SGX AsiaClear futures in Singapore have dropped for the past five weeks in the longest run since 2014, and the forward curve shows prices back below $50 in December. Financial markets in China, including iron-ore futures in Dalian, are shut for the rest of this week for the Mid-Autumn Festival holiday.

New supplies are coming from Australian billionaire Gina Rinehart’s Roy Hill mine in the Pilbara, as well as Vale’s giant S11D project, which is expected to ship its inaugural cargoes in January. Roy Hill Holdings CEO Barry Fitzgerald said on Wednesday that it’ll reach full capacity of 55-million tons only in early 2017 instead of late this year.

Vale said Tuesday that while S11D has capacity to produce 90-million tons a year, constraints mean the net gain will be 75-million tons. It will take four years to reach full output, according to  Peter Poppinga, head of ferrous minerals, who expects the market to be balanced into 2017. Cliffs CEO Lourenco Goncalves has said S11D is a “replacement mine, not addition of more tons.”

BHP'S VIEW
Others are more bearish. BHP Billiton says prices will probably drop as the underperformance of supply this year is reversed over the next 12 to 18 months. Westpac said last month rising supply will drive prices below last year’s nadir of $38.30, while Citigroup expects an average of $45 next year.

Exports from the top two shippers will expand faster next year than China’s imports, according to the Australian government’s latest outlook. Australia and Brazil will probably ship a combined 1.3-billion tons, 6.5% more than this year, while China’s imports will climb 0.7% to 981-million tons.

“Iron-ore is susceptible to price weakness because the fundamentals of the sector are not compelling,” said Gavin Wendt, founding director & senior resource analyst at MineLife in Sydney.

“Supply remains abundant and the strength of Chinese demand remains questionable.”