Iron ore and coal
forecasts have been reduced by Citigroup Inc., as cheaper oil and slump in producers’ currencies
combine to cut supply costs.
This signals the energy rout is influencing other commodities. Miners’ shares sank.
As analysts wrote in a report dated Jan 14, iron ore will average $58 a metric ton in 2015 and $62 a
ton in 2016, down from estimates of $65 for both years. The
forecasts for coking coal and thermal coal were reduced for the
same period by as much as 18 percent.
Oil’s drop is negative for iron ore, as well as aluminum, because it lowers the level at which producers curb output in an oversupplied market, according to Macquarie Group Ltd., which estimated 37 percent of its production cost is energy-related.
Goldman Sachs Group Inc. said yesterday that cost-deflation spurred by cheaper energy prices and a rising dollar was contributing toward weaker copper prices. That metal plunged as much as 8.7 percent on the London Metal Exchange today, helping to pull the Bloomberg Commodity Index to a 12-year low.
Iron ore plunged in 2014 after BHP Billiton Ltd. and Rio Tinto Group boosted low-cost output, spurring a surplus just as growth in China slowed. Oil slumped almost 50 percent last year, the most since the financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Iron ore shippers are now benefiting at the expense of Chinese miners as falling transport costs erode domestic producers’ geographic advantage, and depreciating exporter currencies provide a further boost, Szpakowski wrote.
BHP, which produces iron ore as well as crude oil, dropped 2.8 percent to close at A$27.20 in Sydney, the lowest settlement price since March 2009. Rio retreated 3.3 percent to A$55.54, and Fortescue Metals Group Ltd. (FMG) plummeted 8.2 percent.
Australia and Brazil are the world’s largest iron ore exporters, with Rio and BHP competing with Rio de Janeiro-based Vale SA to supply China, the world’s largest buyer. Vale has usurped its two nearest rivals to become the lowest-cost producer as the slump in the price of oil cuts shipping costs, Sanford C. Bernstein Ltd. said in a report this week.
As the Citigroup analysts wrote, as crude oil slumped, bunker fuel prices in Singapore dropped about 55 percent, while Capesize rates for vessels hauling iron ore cargoes from Brazil to China lost 48 percent and Australia to China 36 percent.
The more-distant producers and consumers stand to benefit most “as freight represents a greater share of total costs for such transactions, creating greater savings as costs have fallen,” they wrote. “For example, iron ore freight rates from Brazil have declined $10 a ton since July, while those from Australia have declined $3 ton.”
The Aussie dollar and the Brazilian real each dropped more than 10 percent over the last four months. The Australian currency was at 80.84 U.S. cents at 2:33 p.m. in Singapore after reaching a 5 1/2-year low of 80.33 cents on Jan. 7.
Iron ore costs have fallen about $7 a ton in dollar terms as a result of foreign-exchange moves for high-cost exporters, the Citigroup analysts wrote. In an oversupplied market, which will need to be balanced through cutbacks to production, that’s an ominous sign for prices, they wrote.
Ore with 62 percent content delivered to Qingdao, China, sank 2.2 percent to $68.74 a dry ton yesterday, the lowest price since Dec. 29, according to Metal Bulletin Ltd. The benchmark dropped to a five-year low of $66.84 on Dec. 23.
According to customs data presented yesterday, iron ore imports by China recovered 29 percent to a record 86.85 million tons last month from November. For 2014, they totaled 932.5 million tons from 820.3 million in 2013, the data showed.
Coking coal, used in blast furnaces, will average $113 a
ton this year, 7.4 percent less than previously forecast, and
$127 in 2016, down 9.3 percent, Citigroup said. Thermal coal at
Australia’s Newcastle port, the benchmark for Asian contracts,
will average $55 a ton this year and $64 next year, down 18
percent and 15 percent, the bank said. Indonesia is the world’s
largest exporter of the power-station fuel.
