Cuts to China’s iron ore production will be less than forecasts, with increased output at some lower cost inland mines offsetting closures at smaller coastal mines, according to Goldman Sachs Group Inc. (GS)

Output may decline 10 percent over the two years to 2015, trimming production by 40 million tons, Goldman Sachs Australia Pty’s Global Investment Research Executive Director Christian Lelong said in an interview in Sydney on July 4. That compares with a JP Morgan Chase & Co. forecast that predicts China will need to cut about 64 million tons in 2014 and a further 85 million tons by 2017 to keep the market balanced.

Greater-than-expected production at China’s low grade, underground mines may extend a supply glut of the steelmaking commodity, forcing prices lower in 2015 amid a 28 percent slump this year, according to Lelong.

“This story about Chinese supply being uncompetitive is widely accepted in the market, even though the data to support this view is fairly limited,” Lelong said. “Bigger mines that have had investment in anything from better underground equipment, bigger or more efficient processing plants, most of that production will carry on.”

Chinese miners may match efforts to curb costs in the same way as iron ore producers in Russia, which also operate underground and process lower grade material than the big seaborne suppliers such as Vale SA (VALE3), BHP Billiton Ltd. (BHP) and Rio Tinto Group (RIO), according to Lelong.

Lesson From Russia

One Russian iron ore producer that Lelong interviewed delivers iron ore concentrate with about 66 percent content at a cost of $70 to $75 a ton, demonstrating that Chinese production can also remain competitive, Lelong said, without naming the producer. A price of $80 a ton should be low enough to force out enough seaborne capacity to keep the market in balance, he said.

Iron ore with 62 percent content delivered to the Chinese port of Tianjin traded at $96.50 a dry ton on July 4, according to The Steel Index Ltd. Prices have rallied 8.4 percent since dropping to $89 on June 16, the lowest since September 2012.

Lelong’s forecast compares with a June prediction from Australia’s government commodity forecaster that a large proportion of China’s domestic production is loss-making at current prices and mines are likely to close by the end of the year. Chinese supply is already declining as a mine is shuttered every day, Citigroup Inc. analyst Ivan Szpakowski said June 27.

The Chinese mines most likely to shutter are high cost operations in coastal provinces where there has been little investment in equipment or mechanization, Lelong said. China’s domestic iron ore production will decline 16 percent to 310 million tons this year and contract to 275 million tons in 2015, Credit Suisse Group AG said on June 23.

China’s domestic ore costs about $75 to $145 a ton to produce, the National Development & Reform Commission said in May. That compares with a break-even price per ton of $44 for Rio Tinto, $53 for BHP, $68 for Vale SA and $77 for Fortescue Metals Group Ltd. (FMG), according to UBS AG estimates.