Iron ore will slump into the $US30s-a-tonne range this year as low-cost supplies rise and steel demand in China shrinks, according to Andy Xie, a Shanghai-based independent economist who's forecast a rout for years.
"When it peaked at $US190, I started talking about a collapse and nobody believed me," said Mr Xie, a former Asia-Pacific chief economist at Morgan Stanley. "We need to see prices much, much lower. It can still go down through $US40 before we bounce back."
The raw material used to make steel will probably average $US50 this year, a level that he's predicted since 2012, said Mr Xie, who's tracked the Chinese economy for more than two decades. Prices need to decline to a level that's so painful higher-cost Chinese mines will be forced to give up, he said.
Iron ore prices collapsed 47 per cent in 2014 and extended declines this year as surging low-cost output from Rio Tinto, BHP Billiton and Vale spurred a glut just as growth in China slowed. China expanded at the weakest pace last year since 1990 amid a property market slowdown as policy makers sought to shift the economy away from investment toward consumption. The country accounts for about half of global steel production.
"We have a situation of declining demand and increasing supply," said Mr Xie, who also worked for the World Bank. "Domestic steel demand in China is actually declining and that trend is going to last a long time."
Ore with 62 per cent content delivered to Qingdao, China, peaked at $US191.70 a dry tonne in February 2011, according to Metal Bulletin. In September 2012 Mr Xie said prices would drop to $US50, probably by mid-2013, repeating a forecast.
Prices, which fell every quarter in 2014, sank 1.5 per cent to $US61.64 on Thursday, the lowest on record going back to May 2009.
While banks including Goldman Sachs see further losses, they aren't as bearish as Mr Xie, and London-based Rio Tinto this week repeated its outlook that China's steel output will go on expanding. Goldman forecasts an average of $US66 this year, while Citigroup sees $US58 and UBS has a $US66 forecast.
"I reconfirm our view on an attractive long-term demand for iron ore, driven primarily by China," Alan Smith, Rio's Asia president for iron ore, told a conference in Beijing on Wednesday. China's crude-steel production would expand from 823 million tons last year to 1 billion tons by 2030, Smith said.
Rio's plans to expand low-cost output remained on track, with production from Western Australia's Pilbara region set to rise to 350 million tonnes by 2017, Smith said. The market was in a period of transition as higher-cost supply was displaced, he said.
In 2014, China's steel production was little changed as local demand fell and exports rose. Domestic consumption dropped 3.4 per cent to 738.3 million tonnes, the China Iron & Steel Association said on its website. Crude steel-output rose 0.9 per cent, the weakest growth in at least 24 years, data from the statistics bureau showed. Exports jumped 51 per cent to a record 93.8 million tonnes.
"Steel output is still up marginally, but minus export growth, domestic demand actually fell," said Mr Xie, who forecast that some steel plants and high-cost iron ore in mines in China will be closed as the world's biggest miners expand further.
Global seaborne iron ore supplies will climb 6.3 per cent this year, beating demand growth of 4 per cent, UBS said in a report last month. The worldwide surplus will swell from 35 million tonnes this year to more than 200 million tonnes in 2018, it said.
"It's not rational for them to cut production to hold up the price because you only encourage high-cost mines to keep producing," said Mr Xie, referring to the so-called big four iron ore suppliers, Rio Tinto, BHP Billiton, Fortescue Metals and Brazil's Vale.
"Iron ore has not bottomed."