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Bear Case — Iron Ore to Hit $50 in 2013

Global iron ores prices, which are already near three-year lows, have more to fall, says independent economist Andy Xie. He forecasts prices to drop more than 40 percent to $50 per metric ton by mid-2013.

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Since July, iron ore prices have slumped more than 35 percent, tracking the decline in Chinese steel futures, which plunged to an all-time low on Wednesday on weakening demand out of the world’s second largest economy.

According to Xie, elevated steel inventories in the mainland will be a drag on iron ore prices in the short-term, and slowing growth in the country will weigh on prices over the longer-term.

“Early in the year I was expecting the price to bottom at $100/metric ton…after several rounds of interactions with China's steel industry I became more bearish. The main reason is high steel inventory and lack of growth prospects,” Xie, former Morgan Stanley Chief Asia-Pacific Economist, wrote in a note.

Iron ore stockpiles at major Chinese ports stood at above 98 million metric tons last week, close to the record high of approximately 101 million metric tons set in February, according to Reuters.

Current inventory in the mainland is close to two months of demand, Xie said, adding that production in China is still on the rise despite declining demand. In a market where demand and supply is balanced, inventory levels typically amount to three weeks of demand, say analysts.

“Chinese local governments resist cutting production and arrange financing to keep the mills in their cities producing. This story will come to a crashing end,” Xie, a well-known China bear, said.

He says steel demand out of China – the world’s biggest consumer- peaked in 2011 at 700 million metric tons, and is set to moderate to 600-700 million metric tons over the next decade, as the annual construction of infrastructure projects such as highways, railroads, and buildings has peaked.

Chinese steel inventories were 26 percent higher in August compared to a year ago, according to financial-services firm The Motley Fool, which quoted data from the China Iron and Steel Association.

“The only meaningful case for the (iron ore) price to go back up is for China's demand to resume skyrocketing like before. I believe it would not happen again. This is the end. The price would stay down permanently. Any rebound would be small and not lasting,” Xie added.

Ric Spooner, Chief Market Analyst at CMC Markets, also does not rule out a price fall to $50/metric ton as supply-demand imbalances can create dramatic price movements. However, he believes a more likely scenario would be a fall to $75-$80/metric ton – a broad support level for iron ore prices.

Spooner says prices will likely be supported as recently announced infrastructure-related stimulus measures boost fixed-asset investment in the mainland. Growth in infrastructure investment is forecast to rise from the current rate of 15 percent year-on-year to over 20 percent in the coming months, according to HSBC.

Unlike Xie, he forecasts steel demand will average 900 million to 1 billion metric tons over the next decade as a result of the country’s “ongoing building program” driven by rapid urbanization.

“We will also see a situation where the Chinese authorities will not want to see prices get out of hand on the downside,” he added.

Warren Gilman, Chairman and CEO of CEF Holdings, who is more upbeat on the outlook for iron ore, says as long as China grows in excess of 7 percent in the coming years, prices above $100/metric ton are sustainable.

Dismissing Xie’s claim, he says “$50/metric ton is just nonsense. Virtually all mines in China, Australia and India would have to close if that price level was sustained.”

“Unless you are forecasting a recession in China, rather than the most pessimistic forecasts of 5 to 7 percent GDP growth, then China will continue to need more iron ore,” he said.