Cleveland Cliffs Inc (CLF)

[Saving Grace]

'Know-nothing' iron bears will be wrong again, says Cliffs Natural Resources CEO

The largest U.S. iron ore producer says the bears are getting it wrong all over again. Prices will probably be sustained above $50 a metric ton as demand in China is stable and the impact of new supply won’t be as severe as forecast, according to the CEO of Cleveland-based Cliffs Natural Resources Inc.

“Those forecasts saying that prices will go to $40 or $30 or whatever, they haven’t materialized,” Lourenco Goncalves said in a phone interview. “It’s not going to happen at the end of the year. Do you know what they’re going to say next? They’ll say it’ll be next year. That’s the reason I don’t believe them. They don’t know anything.”

Iron ore has rallied in 2016, confounding a slew of predictions earlier in the year that lackluster demand in China and rising low-cost supply would combine to drag prices lower. With banks and miners now focusing on the months through to the year-end, some forecasters are again predicting a retreat. This month, BHP Billiton Ltd. called time on the unexpected rally, saying that prices may begin to drop as new supply hits the market.

Prices would probably hold between $50 and $60 a ton, said Goncalves, citing a recent outlook from Li Xinchuang, a vice chairman at the China Iron & Steel Association. Demand in China -- the world’s largest buyer of seaborne ore -- would be stable between 760 million and 800 million tons a year, according to Goncalves.

“I do believe Mr Li,” he said.

China output

When 2016 kicked off, there were plenty of calls that steel output in China would post a significant drop. That’s not yet come to pass, with data on Tuesday showing supply from top steelmaker rose 3% in August. Output in the first eight months was 536 million tons, barely changed from a year ago.

Iron ore with 62% content delivered to Qingdao in China fell 0.6% to $57.78 a dry ton on Friday, Sept. 9, according to Metal Bulletin Ltd. While it’s up 33% this year, prices fell every day last week after the BHP forecast to post the longest losing run since July. Stock in Cliffs has more than trebled in 2016, while BHP advanced 12% in Sydney.

Morgan Stanley is among those foreseeing weakness, saying last month that prices may tumble back to $40 this half as the approach of winter in China typically blunts steel demand and output. Citigroup Inc. has said iron ore’s rally won’t last, with prices set to average $45 a ton next year as supply gains.

‘Replacement mine’

The probable impact of additional supply -- including expansions by top exporter Vale SA in Brazil as well as the rampup at Australian billionaire Gina Rinehart’s Roy Hill -- may have been overstated, while the largest producers are now restraining output increases, Goncalves said.

Vale has said it will probably start supplying ore from its 90-million-ton a year S11D operation by year-end. Rinehart’s Roy Hill is building up output this year toward a target of 55 million tons a year, with much of the new supply going to overseas partners including Japan’s Marubeni Corp. and South Korea’s Posco.

“Vale’s trying to explain that S11D is a replacement mine, not addition of more tons,” Goncalves said.

While Roy Hill will produce a little more, the tonnage going to Posco and Japan isn’t destined for the mainland China market, according to Goncalves.

http://www.crainscleveland.com/article/20160913/NEWS01/160919957/know-nothing-iron-bears-will-be-wrong-again-says-cliffs-natural