Australia Cuts Iron Ore Price Forecast by One-Third for 2015

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Researched by Industrial Info Resources Australia (Perth, Australia)--Australia has reduced its iron ore price forecast by 33% to $63 per tonne for 2015. The metal hit a five-year low of $68 per tonne just before Christmas.

The government of Western Australia has announced the set of cutbacks and savings to tackle a $1.8 billion budget deficit, which was caused in part by falling royalty payments from iron ore producers.

Iron ore accounts for about 55% of the Western Australia's total exports. The year began with prices at just more than $135 per tonne, but they have fallen almost 50% since.

In September, the Bureau of Resources and Energy Economics had forecasted the 2015 prices to be about $95 per tonne. However, a rapid increase in supply, and moderating growth in China's steel production, has caused prices to drop 38% in just over a single quarter. Iron ore producers were expecting a small price increase during December, due to pre-winter restocking by Chinese steelmakers.

The rapid expansion and production boost from iron ore giants such as BHP Billiton (NYSE:BHP) (Melbourne, Australia), Rio Tinto plc (NYSE:RIO) (Melbourne) and Vale S.A. (NYSE:VALE) (Rio de Janeiro), in order to reduce costs per tonne and drive the smaller producers out of market, has resulted in oversupply. However, none of the big producers are showing any signs of slowing down, with BHP announcing the addition of 65 million tonnes over the next three years, and Rio Tinto announcing plans to ship an additional 40,000 tonnes in 2015.

These expansion plans came under fire from the Western Australian government, and especially from smaller iron ore miners, who are less able to absorb lower prices. BHP has defended its move, saying that the expansions were planned years in advance and were approved by the state government.

Jimmy Wilson, BHP's President of Iron Ore Business, was quoted as saying that "when the prices have been so high over such a long period of time, you are going to induce more supply, and when that supply comes on, we shouldn't be awfully surprised. This is the commodity cycle."

The Bureau of Resources and Energy Economics expects prices to rebound in the second half of 2015, as some iron ore miners cease production, and housing construction activity in China starts to recover.

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