Iron ore seen below $40 by Andy Xie on China steel slowdown

Posted on February 06, 2015 08:15:51 PM | BREAKING NEWS

IRON ore will slump into the $30s a metric ton this year as low-cost supplies rise and steel demand in China shrinks, according to Andy Xie, a Shanghai-based independent economist who’s forecast a rout for years.

“When it peaked at $190, I started talking about a collapse and nobody believed me,” Shanghai-based Xie, a former Asia-Pacific chief economist at Morgan Stanley, said in a phone interview on Thursday. “We need to see prices much, much lower. It can still go down through $40 before we bounce back.”

The raw material used to make steel will probably average $50 this year, a level that he’s predicted since 2012, said Xie, who’s tracked the Chinese economy for more than two decades. Prices need to decline to a level that’s so painful higher-cost Chinese mines will be forced to give up, he said.

Iron ore collapsed 47 percent in 2014 and extended declines this year as surging low-cost output from Rio Tinto Group, BHP Billiton Ltd. and Vale SA spurred a glut just as growth in China slowed. China expanded at the weakest pace last year since 1990 amid a property market slowdown as policy makers sought to shift the economy away from investment toward consumption. The country accounts for about half of global steel production.

“We have a situation of declining demand and increasing supply,” said Xie, who also worked for the World Bank. “Domestic steel demand in China is actually declining and that trend is going to last a long time.”

Lower Prices

Ore with 62 percent content delivered to Qingdao, China, peaked at $191.70 a dry ton in February 2011, according to Metal Bulletin Ltd. In September 2012 Xie said prices would drop to $50, probably by mid-2013, repeating a forecast. Prices, which fell every quarter in 2014, sank 1.5 percent to $61.64 on Thursday, the lowest on record going back to May 2009.

While banks including Goldman Sachs Group Inc. see further losses, they aren’t as bearish as Xie, and London-based Rio Tinto this week repeated its outlook that China’s steel output will go on expanding. Goldman forecasts an average of $66 this year, while Citigroup Inc. sees $58 and UBS Group AG has $66.

“I reconfirm our view on an attractive long-term demand for iron ore, driven primarily by China,” Alan Smith, Rio’s Asia president for iron ore, told a conference in Beijing on Wednesday. China’s crude-steel production will expand from 823 million tons last year to 1 billion tons by 2030, Smith said.

Export Surge

In 2014, China’s steel production was little changed as local demand fell and exports rose. Domestic consumption dropped 3.4 percent to 738.3 million tons, the China Iron & Steel Association said on its website Jan. 22. Crude steel-output rose 0.9 percent, the weakest growth in at least 24 years, data from the statistics bureau showed. Exports jumped 51 percent to a record 93.8 million tons.

“Steel output is still up marginally, but minus export growth, domestic demand actually fell,” said Xie, who forecast that some steel plants and high-cost iron ore in mines in China will be closed as the world’s biggest miners expand further.

Global seaborne iron ore supplies will climb 6.3 percent this year, beating demand growth of 4 percent, UBS said in a Jan. 15 report. The worldwide surplus will swell from 35 million tons this year to more than 200 million tons in 2018, it said.

“It’s not rational for them to cut production to hold up the price because you only encourage high-cost mines to keep producing,” said Xie, referring to the so-called big four iron ore suppliers, Rio Tinto, BHP Billiton, Fortescue Metals Group Ltd. and Brazil’s Vale “Iron ore has not bottomed.” -- Bloomberg