Australia slashes iron ore outlook on increased supply

According to the latest quarterly report from the Bureau of Resources and Energy Economics (BREE), iron ore spot price is forecast to average US$105 a tonne in 2014 — 16% lower than last year. And it gets worse:  For 2015 the bureau expects the raw material to average about $97 a ton from $103 estimated in March.

“Although steel production in China remains historically high, high iron ore port stocks and low steel prices have combined with a surge in the availability of supply coming from Australia to push prices down,” the report says.

Waning Chinese demand coupled with an ever increasing worldwide glut of the steel-making material saw iron ore tumble to $89 a metric ton on June 16, the lowest since September 2012. The good news are that lower  prices are unlikely to affect the production rates of most iron ore mines in the Pilbara, which have some of the lowest production costs in the world, the bureau says.

Eyes on China

While higher-cost Chinese mines close due to weak prices, iron ore prices will be contained by a sharp rise in production elsewhere, says the report. The commodity may find a so-called floor at $90 a ton, a level that may put more than a quarter of Chinese capacity out of business and spur production cuts at mines outside the country, according to Citigroup Inc.

“At current prices a large proportion of China’s domestic production is still assessed as loss-making,” it adds.

Shipments from Australia will jump 17% to a record 680 million tons this year and climb to 764 million tons next year, the bureau said. Previously, the bureau estimated exports in 2014 at 687 million tons. The agency’s price forecasts refer to spot ore with 62% content free-on-board Australia.