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China iron-ore mine closures expected to lift prices

(Bloomberg)
Updated: 2014-07-01 14:52
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    IRON-ore prices, which completed a second straight quarterly loss on Monday, will rebound as the daily closure of mines supplying high-cost output in China boosts demand for seaborne shipments, according to Citigroup.
   
    Local suppliers in Asia's largest economy are cutting production even as mills increase steel output on improved margins, said analyst Ivan Szpakowski. An iron-ore mine in China is being shuttered every day, with closures seen in all main producing regions, he said in an interview from Shanghai.
   
    Producers in China, the world's largest user, face a rising challenge of lower-cost supplies from BHP Billiton, Fortescue Metals and Vale after the biggest miners in Australia and Brazil expanded output and spurred a global glut.
   
    While benchmark prices in China posted the biggest three-month loss since 2012, they rose 2.2% last month, the first monthly advance since November last year.
   
    "We're one of the most bullish people in the market," said Mr Szpakowski, reiterating a forecast for prices to average $100/ton in the fourth quarter and $104 this year. "Imported ore is much cheaper than domestic ore, so the shift in buying has moved to imported ore. That is supporting imported prices."
   
    Ore with 62% iron content delivered to Tianjin fell 1.2% to $93.80 a dry ton on Monday, according to data from The Steel Index. The commodity lost 20% this quarter, following a 13% decline between January and March. Prices advanced 3% last week, the most since the period ended on August 16.
   
    "Supply in China has been decreasing," Mr Szpakowski said on June 27, adding there is robust support for the commodity at about $90/ton, with prices unlikely to drop below that level. "Basically, every day there's a mine shutting, so iron-ore supply will continue to fall."
   
    Between 20% and 30% of the iron-ore mines in China have closed down, according to the China Metallurgical Mining Enterprise Association. Local production will decline 16% to 310-million tons this year and contract to 275-million tons next year, Credit Suisse Group said on June 23, citing projections for supply in 62% content terms.
   
    "Chinese producers find it difficult to generate profits and justify production if prices stay below $100," Mine Life founder and senior resource analyst Gavin Wendt said in Sydney. Iron ore in Tianjin has been below that level since May 19, dropping to a low of $89 on June 16. "This in turn will provide some level of price support."
   
    The Chinese market is becoming saturated with lower-cost imports from Australia and Brazil, Morgan Stanley said in a report on Tuesday, forecasting lower prices even as Chinese mines shut down. The bank sees a second-half average of $95/ton, and a drop to $90/ton next year.
   
    "We believe cost support provided by higher-cost Chinese operations will cease to exist as Chinese mines see widespread closures leading to a decline in prices," Morgan Stanley analysts wrote.
   
    The biggest closures of Chinese supply may be in Hebei as the province is the largest producer and has some of the highest costs, according to Goldman Sachs Group, which sees prices averaging $108 this year and $80 next year.
   
    China will need to cut about 64-million tons of output this year, and a further 85-million tons by 2017, JPMorgan Chase analysts including Daniel Kang wrote in a report on Monday. While this year's estimate was cut to $105 from $118, there is scope for a better second half on record Chinese steel output and as most new supply growth in Australia has already begun, he said.
   
    Fortescue expects that prices will recover to about $110/ton, chief financial officer Stephen Pearce said, citing strengthening economic data in China and the decline of stockpiles at ports.
   
    A Chinese manufacturing index released last week showed that factory activity rose to a seven-month high last month, supporting Premier Li Keqiang's contention that the economy will avoid a hard landing as the government steps up efforts to spur growth. The country buys about two-thirds of the world's seaborne iron ore, said Morgan Stanley.
   
    Stockpiles at Chinese ports fell 0.9% to 112.65-million tons in the week to June 27 from a record 113.65-million tons a week earlier, according to Shanghai Steelhome Information Technology. Inventories have expanded 30% this year.
   
    "Every ore-producing province has mines shutting down," said Mr Szpakowski. "We think that prices will continue rising."
    
   
 

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