Vale’s Cut Is No Panacea for Iron Ore, Morgan Stanley Says – by David Stringer (Bloomberg News – July 13, 2015)

Iron ore prices trading near the lowest level since at least 2009 will probably remain under pressure and may even extend declines after Brazil’s Vale SA announced changes to production plans, according to Morgan Stanley.

The world’s biggest producer said on Monday that it would cut about 25 million metric tons of higher-cost supply from this month, while sticking to a full-year output target of 340 million tons.

The decisions are a recognition that the market is oversupplied this year and will probably remain in surplus in 2016, according to Executive Director Peter Poppinga.

“This will not lead to higher iron ore prices in the short term — it could even have the opposite effect,” Morgan Stanley analysts wrote in an e-mailed report. The changes by Vale won’t reduce supply, rather they will add more lower-cost material into the export market, the analysts said.

Benchmark prices are mired in a bear market as Vale and its main Australian competitors — Rio Tinto Group and BHP Billiton Ltd. — increase low-cost production even as demand stagnates in China, spurring a glut.

Prices have tumbled to a so-called new-normal level, which may persist through to 2020, according to Rio Tinto, which has defended its expansion strategy. Iron ore imports by China shrank in the first six months of the year, underscoring weakening demand growth, data showed on Monday.

“It’s good news for the market,” Caue Araujo, iron ore industry director at the research company AME Group, said by phone from Perth. “We still need some good news on the steel side to have momentum for a price recovery in iron ore.”

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