(Bloomberg) — Iron ore may extend declines as weakening producer currencies shrink domestic mining costs, reducing incentives for the supply cuts needed to balance the market, according to Societe Generale SA.
Lower energy prices have lessened freight expenses and the inability of many high-cost Chinese miners to cut output means prices will stay weak, Mark Keenan, the Singapore-based head of commodities research for Asia, said Thursday. The raw material fell below $50 a metric ton on Wednesday and will probably drop to the low $40s in coming weeks, IG Markets Ltd. says.
Prices plummeted last year and extended losses in 2015 as Rio Tinto Group and BHP Billiton Ltd. expanded low-cost supply and demand from China, the biggest user, weakened. The seaborne glut will grow to 184 million tons in 2018 from 55 million tons this year, Morgan Stanley says. Deutsche Bank AG predicts global demand will shrink this year for the first time since 2009.
The weaker currencies “provide a degree of insulation at the producer level from falling dollar prices” of iron ore, Keenan said by e-mail in response to questions. “Declines in bunker fuel, driven by the fall in oil prices, have also reduced shipping costs of ore significantly.”
Ore with 62 percent content at Qingdao, China, retreated 3.5 percent to $49.53 a dry ton on Wednesday, according to Metal Bulletin Ltd. That’s the lowest level since 2005, based on daily and weekly data from Metal Bulletin and annual benchmarks compiled by Clarkson Plc, the world’s largest shipbroker, for ore delivered to China.
The Australian dollar and the Brazilian real have dropped 18 percent and 28 percent against the U.S. currency in the past 12 months, data compiled by Bloomberg show. The Australian dollar is trading near its lowest level since 2009 and the real is near its weakest since 2003.