Australia's Iron Exports to Drop for First Time in 18 Years

(Bloomberg) -- Iron ore exports from Australia are set to post the first annual drop in almost two decades following bad weather and output setbacks, worsening a global shortage and bolstering prices that have already surged to a five-year high. Futures advanced.

The world's top shipper cut its 2019 forecast to 814 million tons from 867 million in March and boosted its estimate for this year's average price by almost 20%, according to a report by the Department of Industry, Innovation and Science on Monday. That would be the first contraction since 2001. Last year, Australian exports totaled 835 million tons.

Iron ore has soared above $100 a ton, driven by the twin forces of supply disruptions in Brazil and Australia and strong demand from steel mills in China. This will push the value of Australia's exports to A$79 billion ($55 billion) in fiscal 2020, reflecting higher prices that are largely due to Vale SA's dam disaster in January, the department said.

“The iron ore price is expected to be higher than previously forecast -- and for a longer period -- due to the limited capacity of other operations in Australia and elsewhere to ramp up and replace Vale's production loss of high-grade supply, at least in the short term,” the report said.

On Monday, futures on the Singapore Exchange surged as much 6.3% to $120 a ton, the highest since 2014, while the contract in China jumped 4.1%. Benchmark spot ore was last at $118.05 a ton, according to Mysteel Global. In Sydney, miners' shares rose.

Rio Tinto Group and BHP Group both revised down their annual production outlooks in the wake of Cyclone Veronica in the first half, and Rio in June further lowered its output target after problems at its sprawling operations in Western Australia.

“The seaborne iron ore market is thus likely to stay tight, and prices elevated, out to at least 2021,” the report said.

Global seaborne iron ore supply is forecast to decline by 4.1% to around 1.5 billion tons in 2019, driven by events stemming from the dam collapse, the report said. Vale's production is expected to gradually recover over the next three years, with the full recovery in its production hinging on 60 million tons of production associated with the use of tailings dams, the department said.

At the same time, steel production in China is heading for a record year, the department said. Infrastructure stimulus and good margins will aid the sector, although production will gradually decline through 2021. The world's largest steelmaker had pushed run-rates to a record above 1 billion tons a year, according to Bloomberg calculations based on official statistics.

An expected slowdown in global economic growth in 2019 and 2020 is a key risk to the outlook, and will likely to lead to less demand for steel-making inputs — metallurgical coal and iron ore, the report said. However, China is expected to respond to slowing growth and U.S.-China trade tensions by loosening monetary policy and increasing government spending on infrastructure and construction projects, it said.

To contact the reporter on this story: Krystal Chia in Singapore at kchia48@bloomberg.net

To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Keith Gosman, Jake Lloyd-Smith

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