Iron ore is heading toward its first surplus in at least a decade as output expands and Chinese steel mills, the biggest buyers, boost production at the slowest pace in five years.
Seaborne supply will advance 9.1 percent and demand 8.3 percent in 2013, led by exporters from Perth-based Fortescue Metals Group Ltd. (FMG) to Vale SA (VALE5), Morgan Stanley forecasts. A surplus will emerge in 2014 and keep widening until at least 2018, the bank predicts. Prices will slump as much as 34 percent to $90 a ton by the end of December, according to the median of seven analyst estimates compiled by Bloomberg.
Exports of the biggest seaborne cargo after oil are surging the most since 2010 after prices jumped as much as sevenfold in the past nine years. Goldman Sachs Group Inc. expects China’s imports to climb 4 percent in 2013, the least in three years. Its steel output will expand 2.6 percent as the nation’s economy grows at the second-slowest pace in the past decade, according to estimates from Morgan Stanley and economists surveyed by Bloomberg.
“We’ve got a steady lift of supply, mainly out of Australia,” said Tom Price, the Sydney-based analyst at UBS AG who has covered the market for about a decade. “We’ve observed for a couple of years now moderation in demand growth in China. A combination of those two is why we’re bearish.”
The commodity has tumbled 15 percent to $135.60 from a 16- month high in February, according to a gauge for China from The Steel Index Ltd., a unit of McGraw-Hill Cos. Iron ore’s drop of 6.4 percent this year compares with the 1.4 percent fall in the Standard & Poor’s GSCI gauge of 24 raw materials. The MSCI All- Country World Index (MXWD) of equities rose 5.1 percent and Treasuries were little changed, a Bank of America Corp. index shows.
Exports will advance to 1.178 billion tons this year, as demand expands to 1.258 billion tons, Morgan Stanley estimates. The implied shortfall of 80.7 million tons will switch to a surplus of 3.3 million tons in 2014, rising to 291 million tons in 2018, the bank forecasts.
Iron ore accounted for 78 percent of earnings before interest, taxes, depreciation, and amortization last year for London-based Rio Tinto Group (RIO), the biggest supplier after Rio de Janeiro-based Vale, data compiled by Bloomberg show. For Melbourne-based BHP Billiton Ltd. (BHP), the third-largest exporter, it contributed 44 percent. Vale, Rio, BHP and Fortescue supply 71 percent of seaborne cargo.
The swaps market is already anticipating lower prices through 2013 and into next year. The December contract is at $119.75, compared with $136.75 for this month and $115 a year from now, data from GFI Group Inc. show. Trading volumes in derivatives more than doubled in the past year, exceeding 18.3 million tons in February, according to The Steel Index.
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