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Goldman Joins Banks Cutting Iron Ore Outlook on Global Glut
Rio Tinto Group (RIO ▲ 0.64% 56.86), BHP Billiton Ltd. and Vale SA (VALE5▼ -2.64% 18.84) invested billions of dollars to boost output and as China grew at the slowest pace in more than two decades. Cheaper energy costs and depreciating currencies may delay supply cuts needed to rebalance the market, causing prices to extend losses, said Citigroup and UBS, which pared estimates for the commodity by as much as 22 percent.

“Significant overinvestment to date will ensure that the market is well supplied, while demand from the Chinese steel sector is maturing,” Goldman analysts including Christian Lelong wrote in the report. “A painful war of attrition awaits” the iron ore industry as less competitive mines shut, the analysts said.

Five-Year Low
Ore with 62 percent content delivered to Qingdao, China, declined 0.6 percent to $66.42 a dry ton on Jan. 23, the lowest level since 2009, according to Metal Bulletin Ltd. Prices capped the third consecutive weekly loss, the longest streak since November.

Citigroup reduced forecasts to $58 in 2015 and $62 next year, down from estimates of $65 for both years, according to a report dated Jan. 14. UBS sees the raw material averaging $66 this year, 22 percent less than previously forecast, and $65 in 2016, down 21 percent, and lists iron ore as its least-favored metal, it said Jan. 15.

Low-cost expansions will probably continue as major producers are still mining iron ore at a profit, Goldman said. This will expand the global seaborne surplus from 47 million tons this year to 260 million tons by 2018, the bank estimates.

Market Share
Exporters from Australia are winning the battle for market share in China, accounting for 59 percent of imports last year from 51 percent in 2013, according to customs data on Friday. Brazil’s sharewas 18 percent from 19 percent, while exports from the rest of the world fell to 23 percent from 30 percent.

Gripped by a property downturn and excess capacity, China’s economy expanded 7.4 percent last year at the slowest pace since 1990, data on Tuesday showed. Over the same period, crude-steel production expanded 0.9 percent from 7.5 percent the previous year, says China’s National Bureau of Statistics. That was the weakest growth in data going back 24 years.

“The decade-long love affair between China and iron ore is cooling,” Goldman said. “We consider China to be a mature market and import growth is bound to moderate in line with domestic steel consumption.”

Balancing the market in the face of stronger supply growth and slowing demand will result in more closures among high-cost producers, which will last beyond 2016, according to the bank. That burden will fall mainly on less competitive seaborne miners as output cuts in China won’t be sufficient, it said.

About 29 million tons of seaborne capacity this year and 101 million tons in 2016 will shutter, Goldman predicts. The marginal cost of seaborne production is set to drop 17 percent to $65 by next year, the bank said. Mines with operating costs above this level would be forced to close.