Citigroup cuts long-term iron ore forecast to $55 as demand shrinks

Says demand led by top consumer China will contract from 2018 to 2025 while low-cost output will rise

Citigroup has slashed its long-term iron ore price forecast by 32% to $55 a tonne, predicting global demand led by top consumer China will contract from 2018 to 2025 while low-cost output will rise.

"Perhaps the greatest structural challenge facing the iron ore market is the rolling over of Chinese iron ore demand, driven by declining domestic steel demand and rising scrap availability," the US bank said in a report.

Global demand for the steelmaking commodity is likely to decline by more than 60 million tonnes between 2018 and 2025, said Citigroup,

It cut its long-term price forecast from 2018 from $81 per tonne to $55, although this is still well above its annual average price estimate of $40 a tonne over 2016-2018, which it kept unchanged.

Pressure from a global glut and slowing Chinese demand pushed iron ore to a 10-year low of $46.70 a tonne in April. It has since recovered to stand at $62.10 on Tuesday, but is still less than half of last year's peak.

China's steel consumption shrank last year for the first time since 1981 and continued to contract in the first quarter of this year as overall economic activity slows. The economy is forecast to expand this year at its slowest pace in 25 years.

"As China's growth slows and re-orients, we see no single replacement for its role as the world's factory. In its place, we expect more decentralized, desynchronized and multipolar growth," said Citigroup, which sees world steel demand growing by less than 2% during 2015-2020 and largely flat through 2025.

Rising scrap availability in China will also cut its iron ore demand, the bank said.

"The government is encouraging setting up of collection centers, and though the government cancelled tax exemption for steel scrap recycling in 2011, we expect supportive policies in the future," it said.

While demand is expected to drop, low-cost supply is bound to rise, it said, with top miners Rio Tinto and BHP Billiton - the world's lowest cost producers - having the potential to boost combined output to above 900 million tonnes by 2025, about 70% of global import demand.