Iron ore prices are likely to drop to $115/dry mt CFR China this year, lower than Q1's $120.68/dmt average, forcing as much as 70-80 million mt/year of high-cost Chinese supplies to shut, Standard Bank said Monday.
Iron ore reference prices for 62% Fe fines may see trading levels at $108-$122/dmt CFR China for the remainder of 2014, while the range given may be extended $5 either side by restocking and destocking cycles, the bank forecast.
Global iron ore demand led by China, which is deleveraging, is weaker than earlier expected, despite demand growth of 2% outside China following two years of stagnation, Standard Bank's quarterly commodity report said.
China's iron ore demand in 2014 was revised down to 5% growth from a 7% rate earlier, while longer-term growth was expected at a 4% rate.
"China appears to be living a world where 7-7.5% GDP growth is only a headline, not a reality," the report said.
"2014 could well mirror 2012, when published GDP growth rates were circa 8%, yet commodity growth (including the much-watched energy demand figure) remained in the 4% range, dropping China's steel intensity by 50% year-on-year."
Standard Bank said China's property and rail sectors may see the best from any further stimulus, while longer-term, China remains in "its upward urbanisation /industrialisation drive," with steel demand led by private housing and public infrastructure build-out.
Low iron ore prices threaten to knock out iron ore supplies in China and smaller marginal deposits globally, the report said. 2014 may be the first year of permanent iron ore mine closures for the industry, it said.
Over a quarter of China's 400 million mt annual capacity have costs within the $110-130/dmt CFR China range, along with 20-40 million mt of Indian east-coast supplies, it said.
"These are the first tonnes which will be forced to permanently close, as lower cost seaborne growth tonnes (ex-Australia/Brazil primarily) begin to flex their arbitrage advantages to squeeze out their higher-cost brethren," it said.
In the next few years, sustained capacity additions at brownfield iron ore sites along with new mines may continue to press on prices after 150 million mt of capacity is forecast to be added this year, led by Australia, along with Brazil, Canada and West Africa. The oversupply this year may be 84 million mt.
Standard Bank sees additions to global seaborne capacity in 2015 reaching 190 million mt with Roy Hills, Anglo Minas Rio and several other Brazilian expansions, with a net oversupply of as much as 130 million mt.
In 2016, a further 135 million mt in capacity is expected, with excess supply at 80 million mt, assuming 4% Chinese growth.
The onus is on China to lift its iron ore consumption to lap up the ever increasing ore surplus on track for later this decade. The small but growing source of substitute iron from higher ferrous scrap generation in China may also increase its clout from 2017, it said.
