Look To China For Stability In Iron Ore Prices

Michael Teague |

After Goldman Sachs Group (GS) reported last week that record iron-ore production and slower Chinese growth would knock prices down to $115 per ton by next year, and to as low as $80 per ton by 2015, iron-ore company Fortescue Metals Group Limited (FSUGY) today predicted that prices for the metal will stay in a range of $110 to $130 per ton for the near future.

Fortescue’s prediction, in terms of numbers, was more or less in line with Goldman’s forecast from the previous week, but the tone was qualitatively different. China is currently the world’s largest consumer of iron ore, and the Goldman report noted that stockpiles of the material would hit 82 million metric tons by next year. In recent years, the opposite has been the case, with supply lagging behind demand more often than not.

The iron-ore company, on the other hand, based its numbers on the fact that the metal had entered bull market territory last month, and while Chinese growth had slowed from 7.7 percent in the first quarter to 7.5 percent in the recently ended period, the rate would still be strong enough to keep prices relatively stable. Indeed, Fortescue said that it saw Chinese growth “strong and growing at that 7 to 8 percent for the foreseeable future.”

Goldman’s report did touch on a fact that did not figure in the day's news, namely regarding the record production of iron-ore that has been posted by the world’s largest miners, such as Rio Tinto (RIO) and BHP Billiton (BHP) . The latter in particular just posted its thirteenth consecutive record quarter of iron-ore output, while a number of other companies are producing the metal at higher rates than ever.

Since dropping to a 7-month low in the month of May, iron-ore has jumped 25 percent, to yesterday’s price of $137.80 per ton. The differing reports from Goldman and Fortescue are joined by a number of far more divergent predictions from Morgan Stanley (MS) and Deutsche Bank (DB) , who predict a much lower surplus (9 and 27 million tons respectively), and UBS (UBS) , who sees almost double the surplus that Goldman does, some 150 million tons.

Meanwhile, the World Steel Association predicts that Chinese steel consumption will grow 2.5 percent next year.

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Symbol Name Price Change % Volume
AMGY American Metal & Tech Inc 0.01 0.00 0.00 0
BHP BHP Billiton Limited 34.87 0.22 0.63 2,967,215
DB Deutsche Bank AG 14.62 0.13 0.90 7,392,086
GS The Goldman Sachs Group Inc. 177.14 -0.61 -0.34 2,042,775
MS Morgan Stanley 33.52 -0.30 -0.89 10,183,535
RIO Rio Tinto Plc 34.53 0.29 0.85 3,112,664
UBS UBS Group AG Registered 14.36 0.38 2.72 3,516,944


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