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Long-term seaborne supply surplus clouds iron ore outlook

A Citigroup report says global ore demand is likely to contract by more than 60 mt during 2018-25

Kunal Bose 

Contraction in port warehouse stocks in and record trading volume in derivatives on are the likely reasons for smart rise in prices to $63 a tonne from the decade low of $47.08 a tonne on April 2. Not only are current prices well below the record $185 a tonne in January 2011, a fallout of disruptions in supply from then the world's third largest supplier of steel making ingredient India and large nervous buying by China, but most experts doubt their sustainability.

The year-on-year decline in world steel production by 1.7 per cent to 536.485 million tonnes (mt) in the first four months of 2015, thanks principally to Chinese output slipping 1.3 per cent to 270.075 mt is not comforting for ore market. Even more disconcerting is the forecast by (WSA) that global steel use in 2015 will be up only 0.5 per cent to 1.5444 billion tonnes (bt) and then in 2016 by 1.4 per cent to 1.565 bt. This could not be otherwise since accounting for nearly half the world production will see contraction in steel consumption by 0.5 per cent in both 2015 and next year on top of 3.3 per cent demand contraction in 2014 for the first time since 1981.


Steel Authority of India chairman is hopeful that renewed focus on infrastructure and construction will result in Indian steel demand growth of up to nine per cent in 2014-15. But in its demand outlook for steel, did not go beyond saying "We expect positive growth in some economies such as India... where are still developing."

Whatever it is, India being self-reliant in and now an insignificant exporter, its production and use of steel will leave marginal impact on global ore trade. For how long will ore prices at current levels be held remains anybody's guess. After all, the recent ore price spurt is not supported by any underlying improvement in global steel production. Not only that, thanks to mines development projects of dominant low cost producers such as Vale, Rio Tinto and BHP Billiton, ore will remain in growing surplus in the midst of expected demand drop. According to Goldman Sachs, seaborne supply surplus will rise from 47 mt this year to 260 mt by 2016.

A Citigroup report makes two important points. First, global ore demand is likely to contract by more than 60 mt during 2018-25. Second, rising scrap availability as Beijing encourages setting up of collection and sorting centres is likely to restrict Chinese ore import demand in coming years. China's ore imports rose by a hefty 13.8 per cent to 932.5 mt in 2014 as the market had a supply deluge from low cost producers. Continuing rise in global seaborne supply in an environment of weakening steel production has prevailed upon Citigroup to cut its long-term ore price forecast by $26 a tonne to $55. But its annual average price forecast for 2016-18 is significantly lower at $40 a tonne. Christian Lelong of says "market is becoming a zero sum game. Seaborne demand is likely to peak in 2016... Ore prices will gradually decline towards our $40 a tonne forecast by 2017." Long-term bearish outlook for the mineral has prompted several producers and also the Prime Minister of Western Australia where Tilbara region happens to be the world's largest ore production centre to tell the big three to rein in supply growth and go slow with capacity expansion in an already oversupplied market. Like Glencore CEO said, "Oversupplying the market regardless of demand is damaging the industry's credibility."

Earlier, chairman said he was ready to join hands with BHP, Rio and Vale to control production and force up prices. "All of us should cap our production now and we'll find price go straight back up to $70, $80, $90."

Such urgings have, however, invited scorn from industry leaders who believe their slowing down will lead to vacating space for tier-two miners which are to commission over 100 mt capacity in a couple of years. Prevailing low prices have resulted in piling up of debts by tier-two and small miners. According to Federation of Indian Mineral Industries secretary general R K Sharma, about 80 per cent of the fragmented Chinese industry is operating at a loss. "So, mines closure on a large scale is unavoidable defying likely social unrest."

HOSTILE CONDITIONS
  • A Citigroup report says global ore demand is likely to contract by more than 60 mt during 2018-25
     
  • Rising scrap availability as Beijing encourages setting up of collection and sorting centres is likely to restrict Chinese ore import demand in coming years, the report adds
     
  • China's ore imports rose by 13.8% to 932.5 mt in 2014, as the market had a supply deluge from low cost producers
     
  • Citigroup has cut its long-term ore price forecast by $26 a tonne to $55 on the back of rise in global seaborne supply in an environment of weakening steel production has prevailed upon

First Published: Mon, June 08 2015. 22:32 IST
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