Seaborne supply will advance 3.8 percent to 1.09 billion metric tons this year, the smallest gain since 2001, according to Clarkson Plc, the largest shipbroker. Prices in China, the biggest importer, may rise 10 percent to an average of $157.50 a ton in the fourth quarter, the median of 11 analyst estimates compiled by Bloomberg shows. Shares of Vale SA (VALE), which ships more ore than any other company, will rise 19 percent to $30.42 in the next 12 months, the average of 16 estimates shows.

 

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Demand for iron ore may also be curbed by the debt crisis in Europe, where mills produced about 12 percent of the world’s steel last year. Photographer: Vincent Mundy/Bloomberg

New mines and expansions of existing ones are being postponed by rising costs and licensing delays. Morgan Stanley cut its forecast for export supply by 9.6 percent since October and expects a 99 million-ton deficit in the seaborne market this year, at least the ninth consecutive annual shortage. Vale will report its second-biggest profit ever this year, the mean of 11 analyst estimates compiled by Bloomberg shows.

“The wall of additional iron-ore supply that investors have been fearing is going to be late,” said Neil Gregson, who helps manages about $7.4 billion of commodity assets at JPMorgan Asset Management in London. “Iron ore remains a tight market.”

Steel Index

Ore (TSIPIO62) with 62 percent metal content delivered to the Chinese port of Tianjin was at $143 a ton yesterday, a fourth consecutive monthly gain, according to The Steel Index Ltd., which publishes steel, ore and scrap prices. The commodity is measured in dry tons, or metric tons less moisture content.

Iron ore’s 22 percent advance since October compares with a 7.2 percent gain in the Standard & Poor’s GSCI (SPGSCI) gauge of 24 commodities and a 4.1 percent jump in the MSCI All-Country World Index of equities. Treasuries returned 2.3 percent, a Bank of America Corp. index shows.

Prices that rose sevenfold in eight years spurred new products for investors. Deutsche Bank and Credit Suisse Group AG started swaps in 2008 and the Singapore Mercantile Exchange began futures in 2011. About $13 billion of swaps and options were traded in the past three years, with 95 percent linked to the Tianjin price, according to The Steel Index. Fourth-quarter swaps closed at $130.09 on Feb. 28, SGX AsiaClear data show.

Rising prices may spur more production in China. Imports may drop as much as 14 percent this year, Wu Rongqing, the chief engineer of the China Mining Association, said at a conference in Beijing on Feb. 28. Its ore is typically about 25 percent iron, compared with 60 percent inAustralia, increasing costs for mining companies, according to Deutsche Bank AG. Inventories at ports are within 2.7 percent of the record 101 million tons reached Feb. 3, according to Beijing Antaike Information Development Co., a state-backed researcher.

Monetary Fund

Chinese steel consumption hasn’t rebounded since a weeklong public holiday in January because of tighter credit and weaker construction, MEPS (International) Ltd., a Sheffield, England- based industry consultant, said in a report Feb. 27. The nation’s economy, consuming about 65 percent of all seaborne ore, will expand 8.2 percent this year, the slowest growth since 1999, the International Monetary Fund estimates.

Demand for iron ore may also be curbed by the debt crisis in Europe, where mills produced about 12 percent of the world’s steel last year. The economy in the 17-nation euro area will decline 0.4 percent this year, compared with growth of 1.5 percent in 2011, according to the median of 25 economist estimates compiled by Bloomberg.

Higher prices may accelerate projects. Supply almost doubled since 2003, compared with a 25 percent gain in mined copper, Morgan Stanley estimates.

Delayed Projects

Delayed projects include Minas Rio in Brazil, which Anglo American Plc originally expected to open in 2009, and Simandou in Guinea, which Rio Tinto Group anticipates will start in 2015 rather than next year, as previously forecast. Vale (VALE5) said Nov. 28 it delayed the start of an $8.04 billion expansion at the Carajas Sierra Sul mine in Brazil by two years to 2016.

Iron-ore mining costs rose at least 20 percent in Australia and Brazil in 2010, according to UBS AG. Standard Chartered Plc expects a 145 million-ton shortage this year as deliveries from India drop 35 percent because of curbs on mines that don’t have permits to operate and as the government raised export duties. Exports from Brazil, the second-biggest shipper behind Australia, will grow 7 percent, the slowest pace since 2008, Morgan Stanley predicts.

Baltic Exchange

Slowing growth in exports means a continued glut in shipping. Daily rates for Capesizes (BCAVRT), which haul about 80 percent of all seaborne iron ore, slumped 78 percent to $6,010 this year, according to the London-based Baltic Exchange, which publishes costs along more than 50 maritime routes. The fleet expanded 57 percent since the end of 2008 as iron-ore exports advanced 30 percent, data from Redhill, England-based IHS Fairplay and London-based Clarkson show.

Global supply needs to expand by at least 100 million tons a year in the next eight years to meet demand and replace mines that close, London-based Rio said in a presentation on Feb. 28.

China’s government announced plans in April to build 36 million affordable houses by 2015. Each uses about 3.3 tons of steel, MEPS estimates. With 1.6 tons of ore needed to make a ton of steel, the housing program implies demand for 190 million tons of ore, data compiled by Bloomberg show. Construction accounts for 55 percent of steel demand in China, MEPS says.

The Asian nation may also have to seek additional ore supply from Australia and Brazil because of declining cargoes from Iran, which is subject to international sanctions over its nuclear program. China’s ore imports from the country in January were the smallest in two years, customs data show.

Ore Exports

Vale, based in Rio de Janeiro, accounts for about 31 percent of global ore exports, while Rio has a 19 percent market share and Melbourne-based BHP Billiton Ltd. (BHP) 13 percent, according to estimates from Bloomberg Industries.

The Brazilian miner will report net income of $21.38 billion this year, 5.6 percent below the record in 2011, analyst estimates compiled by Bloomberg show. Its shares rose 20 percent to $25.65 in New York this year.

Rio gained 15 percent in London and will rise another 32 percent to 4,746 pence in the next 12 months, the average of 21 estimates shows. BHP advanced 4.9 percent in Sydney and the average of 16 estimates shows it will add another 31 percent to A$47.13 in the next 12 months.

“The market, even though supply is coming back a little bit, will be constrained,” said Michael Widmer, an analyst at Bank of America in London. “Almost every single mine that we had in the pipeline has been delayed.”

To contact the reporters on this story: Maria Kolesnikova in London atmkolesnikova@bloomberg.net; Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter atccarpenter2@bloomberg.net

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