19-08-2016

Iron Ore Veteran Foresees a Challenging ‘17 for the Commodity

IRI

Iron ore strayed well off-script in 2016 as a rally surprised bears. Michael Zhu, former global sales director at Vale SA, says the commodity will probably face a tough year in 2017 as supply keeps on expanding while China’s steelmakers struggle to sustain output at current levels.

“I’m not optimistic that the iron ore price will keep going up,” Zhu, president of Hong Kong-based trader Millennia Resources Ltd., said in an interview, predicting that prices will probably trade between $50 and $60 a metric ton for the rest of 2016. Next year will be challenging even if Chinese steel production holds at current levels because iron ore supply will increase, he said.

Iron ore has soared in 2016 after three annual losses as China added stimulus and a credit-fueled property boom lifted demand, with steel production rising to a daily record in June. Even as the unexpected surge prompted banks from Morgan Stanley to Goldman Sachs Group Inc. to raise their price forecasts this year, they’ve also flagged prospects for increased supply. That includes additional output from Australian billionaire Gina Rinehart’s Roy Hill project and expansions by top exporter Vale in Brazil.

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“There’ll be pressure in the next one to two years,” Zhu, who’s been in the industry for more than 30 years, including 12 at the Rio de Janeiro-based company, said by phone on Wednesday. “The supply is increasing, there’s no doubt about that. The Australians are increasing. In Brazil, Vale is going to have this new S11D.”
Heading Higher

Ore with 62 percent content delivered to Qingdao has risen 39 percent in 2016 to $60.71 a dry ton on Thursday, according to Metal Bulletin Ltd. The benchmark, which peaked at more than $190 in 2011, has traded in a $15 range bounded by the upper $40s and lower $60s for the past three months.

The advance has spurred a rally in miners’ shares this year, with Vale’s stock surging 57 percent, while Australia’s Fortescue Metals Group Ltd. has more than doubled in Sydney. In London, Rio Tinto Group has added 26 percent, while BHP Billiton Ltd. gained 41 percent. Shares of the top four producers were routed last year as iron ore plummeted.

Vale will probably start supplying ore from its 90-million-ton a year S11D operation by year-end. The project may produce between 30 million and 40 million tons next year, Claudio Alves, global director of iron ore marketing and sales, said in May. Rinehart’s Roy Hill is building up output this year.

BHP has also put the spotlight on supply. Chief Executive Officer Andrew Mackenzie said this week that there’s more risk for prices to the downside as the ramp up by low-cost producers continues. Still, iron ore would remain a very high-margin business, according to Mackenzie.
Export Barriers

On the demand side, while steel consumption and output in China have been robust this year, they’re facing challenges from an economy that’s moving away from manufacturing. The U.S. and Europe are also pushing harder than ever to shield local steel industries from Chinese exports, according to Zhu.

Chinese steel production will probably shrink between 3 percent and 4 percent over the next 12 months, driven mainly by lower domestic demand, Moody’s Investors Service said in a report on Tuesday. The country accounts for about half of global steel production and is the largest buyer of seaborne ore.

“Steel demand in China will not increase largely,” said Zhu, who started Millennia in September 2013, and has since diversified into logistics and shipping. “The glorious decade for iron ore has gone. Now it’s a reality that you have to think about how to live with.”

Source: Bloomberg

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