UBS: Expanding supply to knock 2H iron ore price by 25%

By Phoebe Sedgman

(Bloomberg) — Iron ore shipments from Australia are set to pick up in the second half on mine expansions from the largest suppliers, according to UBS Group AG, which forecast that prices may average $45 a metric ton between July and December.Logo of Swiss bank UBS is seen at their offices in New York

While some higher-cost supply is being cut, including from Atlas Iron Ltd., growth in output will continue, the bank said in a report received on Wednesday. Rio Tinto Group’s next 60 million tons a year may come online from the second half, and BHP Billiton Ltd. is still moving toward capacity of 270 million tons a year from an estimated 260 million tons, according to the bank. The new Roy Hill mine may also start shipments, it said.

Iron ore surged toward $60 a ton this month after BHP said that it was deferring some port works in Australia that may slow its growth after 2016. Brazil’s Vale SA followed with a signal that as much as 30 million tons of its higher-cost supply may be cut even as the Rio de Janeiro-based company pressed on with an expansion of cheaper supply.

“We anticipate growth in export volumes through 2015, particularly in the second half, as new capacity from Rio Tinto, Hancock Roy Hill and ongoing asset optimization from BHP Billiton allow increased shipments,” UBS said in the report. “Recent cuts help, but the market is expected to remain in an albeit-smaller surplus over the medium term.”

In April, prices climbed 9.4 percent, the biggest gain since July 2013. They are 69 percent below a 2011 record.

“Supply cuts are not sufficient to drive higher prices when operators are cutting costs, and as demand remains weak,” UBS said. Risks to consumption remained in China, where the property sector is under pressure, it said.

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