Iron seen in low-$40s by Citi as supply grows, demand peaks

SINGAPORE – Iron-ore may extend a slump into the low-$40s as supplies swell and demand reaches a short-term peak amid steel mill restarts and ramp-ups in China, according to Citigroup, which cut its forecasts by as much as 20% over the next year.

The nadir in prices may occur in six to eight months, analysts including Tracy Liao wrote in a report received Monday. Iron-ore is seen at $51 a metric ton in the third quarter compared with a previous estimate of $64, and at $48 in the final three months of the year, down from $60.

The raw material has sunk by more than a third since rising to almost $95 in February as global output increases, with miners such as Vale SA in Brazil and Australia’s Roy Hill Holdings Pty boosting capacity, and China’s efforts to curb financial leverage hurt demand. The pullback in iron-ore is in contrast to surging prices of steel reinforcement bar, and Citigroup estimates that mills have ramped up output to a maximum because of the robust margins.

“Chinese blast furnace utilization and its associated iron-ore demand reached a near-term peak,” the bank said in the report dated June 19. “We foresee more downside risks to iron-ore prices and anticipate the near-term trough to occur in the fourth quarter and first quarter.”

Ore with 62% content at Qingdao was at $56.30 a dry ton Monday, up from $53.36 on June 13, the lowest in almost a year, according to Metal Bulletin.

Even with prices dropping, global supply continues to rise, according to Citigroup, which forecasts a surplus of 118-million tons in 2017 after a glut of more than 60-million tons last year. Ongoing expansion by large miners, notably Vale’s biggest project S11D and Roy Hill, will probably contribute about 60-million tons of additional supply this year, the bank estimates.

Iron-ore will probably trade at about $55 for the next few months, according to Barclays, which said in a note on Monday that the momentum behind the sell-off has abated and further stabilisation in the benchmark price is likely. Futures in Singapore and China extended gains.

Citigroup reduced its price targets for BHP Billiton and Rio Tinto Group while keeping buy ratings on both, according to a separate report received Monday. The bank downgraded Fortescue Metals Group to sell from neutral, saying the producer faces a “double whammy” of lower prices and higher discounts for low-grade products.

Miners’ shares were mixed in Sydney. Rio’s shares fell 0.1% to cap a fifth straight day of declines, while BHP was little changed. Fortescue gained 1.3%. The trio are Australia’s largest shippers.