(Bloomberg) -- The world's biggest iron ore shipper cut its outlook for prices next year by 20 percent as the global market remains well supplied, loss-making miners are holding out and steel output in China will shrink further.
Iron ore is seen at $44.80 a metric ton next year, Australia's Department of Industry, Innovation and Science said in a quarterly report on Friday. That compares with its previous forecast of $56 given in the March quarter. The prediction for 2016 was little changed at $44.20 a ton from $45.
Iron ore prices were whipsawed in the first half of 2016 after three years of declines, and remain 26 percent higher after construction activity in China picked up, supporting demand. Despite the large movements, market fundamentals are broadly unchanged, according to the department, which forecast that while the nation's shipments are set to increase further, export earnings would be flat.
“Given the plans by some miners to increase supply, the glut will probably expand this year,” Xu Ke, an analyst at Huatai Futures Co. in Shanghai, said by phone. “The revised iron ore outlook is reasonable as China's steel industry is undergoing reforms, so demand for raw materials should shrink markedly.”
Price projections by the department refer to spot ore with 62 percent content free-on-board Australia. The commodity delivered to Qingdao was at $55.07 a dry ton on Thursday, according to Metal Bulletin Ltd. Prices hit $70.46 in April, the highest since January 2015. Last year, it bottomed at $38.30.
‘Weak Growth'
“With the expectation of weak growth in consumption and stronger growth in supply, prices are forecast to moderate over the remainder of 2016,” the department said. “The revision is based on the assumption that loss-making operations may continue to produce for longer than previously expected.”
Iron ore may average about $35 a ton through the remainder of the year and in 2017, S&P Global Ratings said Thursday as it lowered the outlook on Australia's AAA credit rating to negative from stable. Australia's government had forecast in a May budget an average price through 2017 of about $55.
Australia's largest operations are low-cost and are expected to remain competitive at prices below $50 next year, the department said. Production from Rio Tinto Group, BHP Billiton Ltd., Fortescue Metals Group Ltd. and new entrant Roy Hill Holdings Pty will represent a combined 92 percent of the country's production in 2016–17, according to the department.
Cargoes from Australia may increase from 818 million tons this year to 874 million tons in 2017, while Brazilian exports will also expand, the department estimates. The two countries are the top shippers. Still, given the price outlook, Australian earnings from exports will ease to A$48.85 billion ($36.7 billion) in 2016-17 from from A$49.14 billion in 2015-16, the department said.
‘Setting Sun'
As authorities in China remain committed to steering the economy away from credit-fueled growth, Australia expects steel output in the largest producer to drop this year and in 2017. China will produce 783 million tons of the alloy in 2016 and 763 million next year, the department estimates.
“The rebound seen in China's demand this year can best be described as the last ray of the setting sun,” said Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen. “Steel is like a human's bones: you use it more when you're younger, similar to the early stages of economic growth. Now, China's economy has aged.”
To contact the reporters on this story: Jasmine Ng in Singapore at jng299@bloomberg.net, David Stringer in Melbourne at dstringer3@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith, James Poole
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