Iron Faces Extra Pressure From China Steel Cuts – Goldman Sachs

Goldman Sachs

Iron ore prices that have been battered by global oversupply may face additional pressure as China’s central government steps up efforts to cut back steel capacity in the world’s top producer, according to Goldman Sachs Group Inc.

The State Council’s plan to reduce the industry’s capacity by 100 million to 150 million metric tons may result in actual steel output dropping by 55 million to 95 million tons, the bank said in an e-mailed report. That lost output represents 90 million to 150 million tons of iron ore, or as much as 15 percent of the seaborne market, the bank estimated.

Iron ore has been in retreat for the past three years as rising low-cost production from the world’s largest miners coincided with shrinking demand for steel in China, spurring a global glut. Goldman reduced its price forecasts in December, raising the possibility that the iron ore industry faces a long period of hibernation. In China, steel mills have reported mounting losses as prices dropped and opposition to record exports climbed.

‘Downward Pressure’

“In the face of ongoing losses, stretched balance sheets and growing trade restrictions, China is under pressure to further lower its steel production,” analysts including Melbourne-based Owen Birrell said in the Feb. 2 report. The projected loss of steel output from the capacity cuts will likely put “further downward pressure on an iron ore market already in oversupply.”

Ore with 62 percent content delivered to Qingdao rose to $44.63 a dry ton on Wednesday, highest level since November, according to Metal Bulletin Ltd. Prices are up 2.4 percent this year after a 39 percent slump in 2015. In December, Goldman forecast that iron ore will average $38 a ton this year and $35 in both 2017 and 2018.

“Clearly some action has to be taken,” Michael McCarthy, chief market strategist at CMC Markets in Sydney, said by phone, referring to capacity-cut plan as China seeks to shift the economy toward consumer-led growth and away from infrastructure. “It requires official sanctions for these companies, in any case, to move to cut their production.”

Goldman’s report noted that the State Council’s plan for the capacity cuts hadn’t come with a timeframe. In China, Caixin reported on Wednesday that the government aimed to implement the reductions within five years rather than three, citing a person familiar with the initiative that it didn’t identify.

Steel capacity in China, which accounts for half of world supply, was estimated at about 1.2 billion tons at the end of last year, according to the China Iron & Steel Association. The country’s crude-steel production shrank 2.3 percent to about 804 million tons in 2015, according to official data.

China’s steel output will extend declines this year as the top leadership has endorsed the push to cut overcapacity, Cliffs Natural Resources Inc. Chief Executive Officer Lourenco Goncalves told Bloomberg this week. The plan was backed Premier Li Keqiang, China’s number-two leader, Goncalves said.

Source: Bloomberg



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