Iron ore prices will fall 19 percent before finding a “long term, sustainable” level as China’s economy slows, according to the head of Fortescue Metals Group Ltd. (FMG), Australia’s third-biggest producer.
The steelmaking raw material will drop to about $110 a metric ton, Fortescue Chief Executive Officer Neville Power said on today’s ‘Inside Business’ program on the Australian Broadcasting Corp. Iron ore traded at $135 on June 1, according to a price index compiled by The Steel Index Ltd.
“Looking forward, we’ve allowed the forecast to drop down to around $110 a ton and done all our modeling around that,” Power told the ABC. “Long term, that will be the sustainable price.” He didn’t say how long that decline may take.
Iron ore in May posted the biggest monthly drop since October on concern that slower growth in China, the biggest buyer, is curbing demand from mills. While the nation is still expanding at an enviable rate, the Chinese economy is enduring “short-term fluctuations,” Power said on today’s program.
China’s economy is forecast to expand 8.2 percent this year, the least since 1999, based on the median estimate of analysts surveyed by Bloomberg last month.
Power said iron ore has proved to be “resilient” and will fetch between $130 and $150 a ton “in the short term.”
Forecasting declines, Power said the Australian government will struggle to meet income targets from its mining tax. The contribution from Perth-based Fortescue, which plans to almost triple annual iron-ore output to 155 million tons by June 2013, will be “negligible” over the next two to three years, Power said.
A tax on profits from iron ore and coal, which won Australian Senate approval in March and takes effect July 1, will reap about A$6.5 billion in revenue over two years from companies including BHP Billiton Ltd. (BHP) and Rio Tinto Group, government estimates show.
“That’s going to be very difficult for them to achieve those revenues,” Power said. “As the iron ore price goes up, that tax liability goes up, but at these iron ore prices, I don’t see us paying any.”
The commodity has lost 21 percent in the past year.
Steel output in China, the world’s biggest producer, declined 1.6 percent to 60.57 million tons in April, the World Steel Association said May 21. Iron-ore imports dropped 8.2 percent to 57.69 million tons in the same month, according to General Customs. Iron-ore and coking-coal buyers are seeking to defer imports as steel mills in China reduced output amid lower prices, Mirae Asset Securities Co. said on May 21.
Premier Wen Jiabao has vowed to focus on increasing growth after trade and domestic demand were below forecasts in April.