Iron-Ore Bear Market Deepens as Aussie Mines Expand

Australia, the largest supplier, sent 504 ships from Port Hedland during the first quarter carrying enough iron-ore exports to build more than 700 Golden Gate Bridges. Shipments jumped 35 percent to the biggest buyer, China, where inventories have ballooned to the highest ever.

After companies including BHP Billiton Ltd. and Rio Tinto Group expanded capacity to meet surging steel demand, output is climbing just as China’s economy slows to the weakest since 1990. Prices that already are down 14 percent in the past year will slump at least 16 percent further in the second half to less than $100 a metric ton, the lowest level since 2012, according to Credit Suisse Group AG and Standard Chartered Plc.

Shipments from Port Hedland, about 1,300 kilometers (808 miles) north of Perth, surged 35 percent to a record 90.4 million tons in the first three months, the port authority says. Exports to China accounted for 79 percent of the total, including 27 million tons in March, the most ever.

More Ore

During the quarter, the total of 504 departing ore carriers was up 30 percent from a year earlier and included 42 ships that hauled at least 230,000 tons each, up from 11, the port says. It takes about 1.6 tons of ore to produce 1 ton of steel, which is used in cars, appliances and building materials, according to the Organization for Economic Cooperation and Development.

The price of ore with 62 percent iron content delivered to the port of Tianjin in China is down 11 percent this year at $119.40 a dry ton on 9 April, after plunging into a bear market and falling to a 17-month low of $104.70 on March 10.

Australia will ship 687 million tons of iron ore this year, 19 percent more than last year, the Bureau of Resources and Energy Economics estimates. More than 70 percent is shipped to China, according to the Australian government. In the second half of 2014, the global surplus of seaborne ore may reach 64 million tons, up from 14 million in the first six months, according to Morgan Stanley.

Expanded Mines

Rio Tinto, the second-biggest iron-ore exporter, plans to boost total output 11 percent this year to 295 million tons, the London-based mining company said Feb. 13. Capacity is almost tripling to 155 million tons at Fortescue Metals Group Ltd. (FMG), based in Perth, Western Australia, and the country’s third-biggest producer. Melbourne-based BHP said its Jimblebar expansion in Western Australia was completed six months early.

Australia production will increase 17 percent to a record 651.4 million tons in the 12 months to June 2014, according to the Bureau of Resources and Energy Economics. That compares with a 10 percent expansion in the previous period.

About 92 million tons of new supply will come from Australia this year, according to London-based Standard Chartered, which predicts a global surplus of 136 million tons, compared with a deficit of 77 million tons in 2013. Global seaborne supply will increase 10 percent to 1.329 billion tons in 2014, pushing the surplus to 74 million tons from 4 million tons, according to Zurich-based UBS AG. Goldman predicts a glut of 80 million tons.

China Spending

The surplus may be smaller than forecast. China announced plans this month to boost spending on infrastructure that would require more steel, and tugboat operators in Australia are threatening a strike that may disrupt shipments. Prices have pared this year’s decline, gaining 13 percent since touching the low on March 10.

China’s State Council targeted 150 billion yuan ($24 billion) of bond sales in 2014 to build railways, mainly in the less-developed central and western regions, and said it will expand plans to speed up construction projects after slowdowns in manufacturing, retail sales and investment. China’s economy expanded sevenfold since 2000, boosting demand for the raw material used to build skyscrapers and railways.

Investors betting against China and its demand for iron ore will be proven wrong, Murilo Ferreira, the chief executive officer of Vale SA, the largest iron-ore producer in Brazil, said on March 19. Growth in China, the world’s second-largest economy, is still more than twice the 2.7 percent forecast in the U.S. China accounted for about 72 percent of the iron ore imported globally last year.

If prices drop to $100, supplies in China may be hurt as domestic mines with high production costs are forced to cut output or close, the Australian government forecaster said. By comparison, Rio Tinto can be profitable above A$39 ($37), while BHP’s break-even is A$41 and Fortescue’s is A$56, UBS estimates.