Iron ore will extend declines into 2016 as weakening steel output hurts demand while the world’s biggest suppliers raise production further, according to a former chief economist at Rio Tinto, who said China would do well to demolish unneeded mills.
“There’s about 300 million tons of surplus capacity in China – that needs to be not just shut down, it needs to be eradicated, it needs to be bulldozed,” David Humphreys, who held the title at Rio for eight years to 2004, said in a phone interview. Steel “production needs to fall,” said Humphreys, 63, who is now an independent consultant.
Iron ore is headed for a third year of losses as the largest suppliers including Rio and BHP Billiton remain intent on raising low-cost production to boost sales while China’s steel industry grapples with shrinking local demand and record-low prices that are crushing profits.
With many mills in the top producer making increased losses, deeper cuts to steel output will occur next year, which will hurt iron ore, according to Citigroup.
“We’re looking at what’s likely to be a fairly soft year for demand and in the absence of any dramatic changes on the supply side, yes, I think it will remain a year of weakness,” Humphreys said from London, referring to iron ore.
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