Citigroup: Iron Ore Will Breach $50 on China Demand



Bloomberg – Iron ore will slump below $50 a metric ton as steel demand in China, the world’s largest producer of the alloy, remains fundamentally weak and mining companies’ costs extend declines, according to Citigroup Inc.

Chinese steel demand shrank in January and February from a year earlier, the bank said in an e-mailed report on Monday that repeated its forecast for a breach of the $50 level, from $54.66 on Friday. Weaker currencies, lower energy prices and reduced freight rates will cut miners’ costs further, Citigroup said.

Iron ore is headed for a record quarterly loss as slowing demand in China coupled with increased supply from Rio Tinto Group, BHP Billiton Ltd. and Vale SA spur a widening global glut. Citigroup has been among the most bearish forecasters for the steel-making commodity, correctly predicting last November that the price would drop below $60 a ton in 2015. Tougher environmental regulations in China were also hurting the outlook for steel output, Citigroup said in the report.

“We remain bearish iron ore and reiterate our expectation that prices will fall below $50,” analysts including Ivan Szpakowski wrote in the nine-page report. “Real steel demand, based on production, net exports, and changes in mill and trader inventories, suggest significantly negative year-on-year growth for January-February.”

Ore with 62 percent content at Qingdao sank on March 20 to the lowest since at least May 2008, according to daily and weekly figures from Metal Bulletin Ltd. Prices lost 23 percent this year, heading for a fifth quarterly retreat. Citigroup’s full-year forecast remains at $58 a ton, Szpakowski said.


Growth Target

China set an economic growth target of 7 percent for this year, the least in more than 15 years, and flagged increasing headwinds that include a property slump. Premier Li Keqiang this month vowed tougher measures to combat pollution, saying that controls so far had fallen short of people’s expectations.

“Perhaps the hottest topic in the Chinese market is increasing environmental pressure,” Szpakowski wrote. “The revised environmental law that came into effect at the beginning of 2015 significantly strengthened enforcement mechanisms, including greatly increasing maximum fines.”

Depreciating currencies and sinking energy prices helped producers to cut their costs, bolstering profit margins even as iron ore collapsed. Fortescue Metals Group Ltd., the world’s fourth-largest exporter, is planning further cost cuts, Chief Executive Officer Nev Power said in Hong Kong on Monday.

“We’ll continue to drive our costs down and position ourselves very strongly on the cost curve,” Power said in an interview on Bloomberg Television. “It’s a matter of how long before demand overtakes supply and absorbs that supply, and then we’ll see a recovery in the price.”