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UPDATE 1-Iron ore forecasts take edge off mining stocks, but miners bullish
March 20, 2013 / 8:27 AM / 5 years ago

UPDATE 1-Iron ore forecasts take edge off mining stocks, but miners bullish

* Forecasts for lower iron ore prices knock mining shares

* Australian forecaster sees iron ore price around $90/tonne by 2018

* Goldman Sachs sees earlier decline

* Miners say China demand has long way to run

By Manolo Serapio Jr and James Regan

PERTH, March 20 (Reuters) - Forecasts for iron prices to fall below $100 a tonne in coming years on increased supply and slower demand from Chinese steelmakers pushed mining stocks lower on Wednesday, although miners believe the boom has a long way to run.

Goldman Sachs cut its forecast for iron ore prices by up to 11 percent over the next three years, while an Australian government forecaster said prices could fall to around $90 a tonne by 2018 from an average of $128 in 2012.

“The decrease in prices is expected in response to moderating demand, particularly in China, and substantial supply increases from mining projects that are already under construction and scheduled to commence operation over the medium term,” Australia’s Bureau of Resources and Energy Economics, or BREE, said in a report.

Rio Tinto Ltd, BHP Billiton Ltd and fellow Australian miner Fortescue Metals Group, which rank only behind the world’s biggest iron ore miner, Brazil’s Vale , plan to add a combined 235 million tonnes of new mine capacity by 2015, nearly equal to Rio’s total output in 2012.

By 2018, Australia will be exporting 821 million tonnes, BREE estimates, a near 75 percent increase on exports of 470 million tonnes last year.

Goldman Sachs said the price decline may come early as supply begins to outpace demand as soon as next year.

Goldman lopped its forecast for 2014 by 11 percent to $115 a tonne and for 2015 by 9 percent to $80 a tonne. It lowered its forecast for 2013 was lowered by 3 percent to $139 a tonne.

“Seaborne prices will be supported in the near-term by high-cost marginal mines in China, but this cost support will be gradually eroded over the next two years,” the investment bank said in a report.

Along with increasing use of scrap steel in China and lower steel production “the result is a market surplus from 2014 onwards, driving prices towards the marginal cost of seaborne supply,” Goldman said.

Shares in BHP Billiton tracked losses in London to fall 2.7 percent in Australian trade, while Rio Tinto’s Australia-listed shares ended down 2.0 percent, putting both stocks at near four-month lows.

MINERS BULLISH

But some mining executives believe iron ore prices still have a long way to go given China’s massive urbanisation push, dismissing market fears of a sustained decline in prices from the second half of this year.

“I think to declare iron ore dead is way too early,” Jim Beyer, chief executive of Mount Gibson Iron Ltd told an industry conference in Perth. “On the demand side, China still has a long way to go.”

Prices of iron ore, the biggest money spinner for Rio, BHP Billiton and Vale, hit a record high of almost $200 a tonne in February 2011, nearly triple the level in late 2008 thanks to China’s robust demand.

Chinese demand began to slow last year, pushing iron ore to three-year lows below $87 a tonne in September and prompting miners to slash costs as margins thinned. Chinese restocking helped prices recover, trading at $134.40 on Tuesday.

Rio warned of softer prices and BHP said volatile markets would continue as China’s appetite eases although neither gave a forecast for future prices.

Fortescue thinks the impact of additional supply on prices may have been overstated.

“We see going forward $120 to $130 a tonne to be a sustainable level,” Nev Power, chief executive of the world’s no. 4 iron ore miner, said at the Mines & Money conference in Hong Kong.

“I don’t see that there’s any major increases in supply that are going to come through and that are going to affect that dramatically,” he said.

For prices to fall below $100 a tonne, Power said around 300-400 million tonnes of new capacity would need to come on.

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