Iron ore demand will increase over the long term as China urbanizes, according to Fortescue Metals Group Ltd. Chairman Andrew Forrest, who said Australia’s third-largest shipper is cutting costs with prices at five-year lows.
About 600 cities in China, each of about 10 million people, will be constructed over the next 30 years, Forrest said in a Bloomberg Television interview today. While there’ll be so-called dips and roundabouts, the curve will be upward, he said.
Iron ore fell into a bear market this year as the biggest producers including Rio Tinto Group (RIO) and BHP (BHP) Billiton Ltd. expanded low-cost output, betting higher volumes would more than offset falling prices while less competitive mines were forced to close. The decline in prices will deepen as a global surplus expands, according to Goldman Sachs Group Inc., which last week declared the “end of the Iron Age” that had been characterized by tight world supplies and above-trend profits for producers.
“Our operating costs into China are about, you know, the mid-$40s to late-$40s, Rio Tinto is about the same, BHP is about the same,” Forrest said. Even with “iron ore prices at $70 or $80, we’re sleeping easily,” he said.
Iron ore with 62 percent content at the Chinese port of Qingdao lost 38 percent this year to $83.06 a dry ton yesterday, according to data from Metal Bulletin Ltd. Prices retreated to $82.22 on Sept. 10, the lowest level since September 2009.
Fortescue dropped 2.8 percent to A$3.82 at 1:47 p.m. in Sydney, down 34 percent this year. The stock fell to A$3.805 earlier, the lowest since August 2013. Rio Tinto lost 0.6 percent to A$61.595, while BHP was little changed at A$35.665.
Global Surplus
China’s urban population surpassed that of rural areas for the first time in 2011 after three decades of development encouraged farmers to seek better living standards in cities. The shift in the world’s most-populous nation boosted demand for construction materials, cars and appliances, luring ore imports from Australia and Brazil as mining companies ramped up output.
While the urbanization trend persists, the pace has slowed and property prices are dropping. A government report in March projected a 6.3 percentage-point rise in the share of people living in China’s cities from 2013 to 2020, down from a 9.4-point gain the previous seven years. Home prices retreated in 68 of 70 cities in August from July, China’s National Bureau of Statistics reported this week.
Swelling Glut
The slump in iron ore came sooner than expected and prices are unlikely to recover, according to Goldman Sachs. The global surplus will more than triple to 163 million tons in 2015 from 52 million tons this year, the New York-based bank said. China’s iron ore imports are seen rising 2.8 percent to 910 million tons next year after rising 7.9 percent to 885 million tons this year, it said in a Sept. 10 report.
Fortescue’s breakeven cost is about $73 a ton, Rio Tinto’s is $45 and BHP’s is $49, according to UBS AG, citing estimates for ore landed in China with 62 percent content. Asia’s biggest economy is the world’s largest buyer of seaborne supplies.
Iron ore may average $90 to $95 a ton over the next five years, according to Wayne Calder, deputy executive director at the Canberra-based Bureau of Resources and Energy Economics. Mine closures around the world will help the raw material to level out even as Australia’s suppliers increase capacity further, Calder said in an interview this week.
Source: Bloomberg