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Why Is BHP Predicting Another 10 Years of Glut for Iron Ore?

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Jun. 28 2016, Published 4:40 p.m. ET

Ten years of iron ore glut

BHP Billiton’s (BHP) CEO Andrew Mackenzie said that there will be at least ten years of iron ore oversupply before demand-supply balances itself. He also added that iron ore would be one of the commodities that would take the longest to stabilize.

As iron ore prices started climbing due to China’s investment-led growth, major iron ore producers started expanding their existing capacities.

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Burgeoning supplies

Many smaller players sprang up to take advantage of the attractive margins miners were earning. China’s slow growth after 2014 and burgeoning supplies from miners contributed to iron ore prices’ coming under increasing pressure.

However, since the start of 2016, commodity prices (COMT), including the price of iron ore, have remained elevated compared to last year’s historical lows. BHP’s CEO has commented on this, saying that the rally is not sustainable.

S11D coming

The capacity expansion undertaken during iron ore’s heydays hasn’t come online yet. Vale’s (VALE) 90 million ton-per-year S11D project is one of these projects. It will come online later this year, with a full ramp-up occurring over the next couple of years.

This project and Australia’s Roy Hill project will keep the iron ore supply buoyant, but demand is not expected to keep pace. This is the main reason that many market participants, including iron ore miners such as Rio Tinto (RIO), BHP, and Anglo American (AAUKY), believe that the current iron ore price rally is not sustainable.

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