For those who like to worry, we have the massive expansion of Chinese steel making capacity. This picture has been discordant for a very long time and leaves me wondering if we are all missing something. The reason that I ask that is that central planning types have a clear picture of what their building objectives are. If that means a cement slab condo for every family in 2030, then warehousing millions of tons of re-bar is plausible and easily financed with low interest money.
Canary In The Iron Ore Pits: Prices Plunge Below $100; Massive Glut Building
By David Stockman June 6, 2014
Iron ore shipments from Australia’s Port Hedland expanded to a record in May as mining companies boosted output, helping to push benchmark prices to the lowest level since 2012 and contributing to a rising global surplus.
Exports from the world’s largest bulk export terminal surged to 36.1 million metric tons from 34.8 million tons in April and 27.9 million tons in May 2013, data on the port authority’s website showed today. Shipments to China were a record 29.9 million tons in May compared with 28.9 million tons in April and 23.3 million tons a year earlier, the data showed.
Producers in the world’s largest shipper including BHP Billiton Ltd. And Fortescue Metals Group Ltd. (FMG) are expanding supplies, betting that increased volumes from low-cost mines will more than offset declining prices. The raw material capped a sixth monthly drop in May in the longest losing run on record. Iron ore could extend declines over the next year, according to Fortescue Chairman Andrew Forrest, and Australia & New Zealand Banking Group Ltd. cut its price forecasts today.
“Miners are lifting output,” said Justin Smirk, a senior economist at Westpac Banking Corp. in Sydney. “As long as iron ore remains at a price where miners can deliver it at a profit, it may be a shrinking profit, but if they’re still making money they’ll keep” producing, he said.
Iron ore with 62 percent content delivered to the port of Tianjin advanced 2.3 percent to $94.60 a dry ton today, according to The Steel Index Ltd. Prices have slumped 30 percent this year, reaching $91.80 on May 30, the lowest since Sept. 7, 2012. They could drop as low as $80 or rise as high at $140 over the next 12 months, Forrest said in Melbourne on May 30.
The global seaborne surplus will jump from 14 million tons last year to 72 million tons in 2014 and 175 million tons in 2015, Goldman Sachs Group Inc. said in a May 20 report. Worldwide supplies will expand 10 percent in 2014, outstripping the 3.7 percent rise in demand, Morgan Stanley predicts.
A further slide in the price would place competitors under pressure, Rio Tinto (RIO) Group Chief Executive Officer Sam Walsh said in an interview with Bloomberg Television yesterday, describing $80 as too low. Rio is the second-biggest producer and last year derived about 88 percent of earnings from the commodity.
“We are the lowest-cost producer in the world, with costs of $20 per ton compared to the price around $92 a ton; I think we’ll be OK,” the 64-year-old Australian said. “I don’t think we’re going to go down to $80 or else a lot of my friendly competitors are going to disappear.”
In the first five months of the year, iron ore exports from Port Hedland totaled 161.3 million tons, 34 percent higher than the same period in 2013, according to Bloomberg calculations based on port data. Shipments to China surged 36 percent to 130.5 million tons in the January-to-May period.
“Our miners are exporting their socks off and thank God because it’s having an impact, a positive impact, on our economy,” Treasurer Joe Hockey told reporters in Canberra today after the release of government figures that showed the economy grew at the fastest pace in two years in the first quarter.
“Growth has been driven unquestionably by net exports,” said Hockey. “But what we found over this March quarter, it’s an extraordinary quarter in March when you don’t have cyclones, particularly in Western Australia affecting Port Hedland.”
While iron ore looks oversold and may rebound as much as 15 percent in the coming months, average prices may be less than previously forecast from this year through 2016, ANZ said in separate reports. Prices may average $110 a ton this year from a previous estimate of $120, and $106 in 2015 from $118, it said. Increased Australian output will hurt higher-cost Chinese supplies, establishing a new floor price at about $100, it said.
Tugboat workers have approved work stoppages at Port Hedland, risking disruptions BHP estimates may cost suppliers A$100 million ($93 million) a day. BHP, Fortescue, Australia’s third-largest producer, and Atlas Iron Ltd. (AGO) all ship output from the Pilbara region through the facility in Western Australia, while Rio Tinto exports through Cape Lambert and Dampier.
The Australian Maritime Officers Union and the Maritime Union of Australia have approved strikes against Teekay Shipping (Australia) Pty in Port Hedland. A third union, the Australian Institute of Marine and Power Engineers is balloting members and expects results from its workers on June 10.
Iron ore stockpiles at ports in China, the world’s largest steelmaker, increased for an eighth month in May, reaching a record 106.86 million tons last week, according to Beijing Antaike Information Development Co.
Fortescue said April 16 it completed an expansion to nearly triple capacity to 155 million tons, while BHP in April raised its full-year output estimate 2.4 percent to 217 million tons after third quarter output surged. Rio said on April 15 that the expansion of its capacity to 360 million tons a year is on track for completion by the end of the first half of next year.
“We are confident with our projections that as we go forward the expansions that we’re making will be justified,” said Rio’s Walsh. “I think that $80 is too low, I suspect a level somewhere north of $100 is probably more realistic.”