Iron Ore Seen Slumping for Years After Hitting February Peak

(Bloomberg) -- Iron ore's surprise early-year rally that neared $100 a metric ton at its peak will probably represent the commodity's high-water mark for at least the next half decade, according to BMI Research, which projects that prices will average lower each year through to 2021.

The commodity will drop to $70 a ton this year, $55 in 2018, and slump to $46 by 2021, according to the research arm of Fitch Group, which cited rising supplies from Australia and Brazil and expectations for a surplus. Major producers, backed by low costs, will boost output, BMI said in a report.

Iron ore stormed higher in the opening weeks of 2017 on rising demand for higher-quality ore as well as optimism from some mills and analysts about the outlook for steel production in China in 2017. After peaking in mid-February, prices tumbled into a bear market as steel prices sagged and banks reiterated warnings about rising supply, including from overseas miners such as Brazil's Vale SA, as well as producers in China, the biggest user.

“Prices are not set to rebound to their January/February 2017 highs in the coming years,” BMI said in the note, which was received on Tuesday. “From 2018 onwards, consistent and large margins of major producers with cash costs of below $20 a ton will incentivize additional output and mining projects, leading to further weakening of iron ore prices.”

Spot ore with 62 percent in Qingdao surged more than 80 percent last year, and went on to hit $94.86 in February, the highest level since 2014, according to Metal Bulletin Ltd. It then sank 12 percent in March, and extended losses this month to $66.07 a dry ton on Tuesday.

Production Reports

Investors will get an update on supply from BHP Billiton Ltd. on Wednesday, when the company releases its production report for the three months to March 31. Last week, Vale posted record first-quarter output as the world's largest shipper started up exports from its $14 billion S11D complex.

As supplies go on rising, including from miners in China, iron ore will retreat below $50 next year, according to Westpac Banking Corp., which placed first in predicting prices in the first quarter, according to data compiled by Bloomberg. The raw material will fall through 2018 to a low of $41, Justin Smirk, the bank's senior economist, told Bloomberg in an interview last week.

Commerzbank AG is bearish too. Supply will continue to exceed demand for the foreseeable future, Commerzbank said in a note on Tuesday, targeting a return to $55 by year-end. “Clearly the gloomier fundamental outlook is shifting back into focus, which justifies even lower prices,” it said.

To contact the reporter on this story: Jasmine Ng in Singapore at jng299@bloomberg.net.

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith