MELBOURNE (Reuters) – Citigroup on Tuesday lowered its forecast for iron ore prices which it expects to hit $70 in May due to softening steel demand that will weigh on prices, it said in a research report.

Citi said it sees a surplus of more than 80 million tonnes of iron ore in the second half following a 17 million tonne deficit in the first half, “suggesting ample downside to the current $80/t spot price.”

With the iron ore market shifting into surplus, Citi said that it expects its 0-3 month $70/t spot price target to be reached “in weeks”.

The forecast sell-off has been slower than expected owing to stronger-than-expected Chinese construction activity and lower-than-expected Brazilian supply so far this year, analysts wrote.

Citi added that disruptions including from Brazil’s Vale due to last year’s tailings dam disaster “remain too low to match demand shocks from blast furnace closures around the world, especially during 2H’20.”

Citi’s research has assumed that Vale produces 315 million tonnes of iron ore this year and sees 20 million tonnes of other disruptions for 2020.

China’s steel demand is expected to contract by 1.5% in 2020, implying flat steel demand for the rest of the year, after apparent demand fell 7% in the first quarter on the year.

In China, weakness in manufacturing-related steel demand, particularly for exports, is expected to be offset by growth in the construction and machinery sectors for the rest of the year.

Citi said it has also found 106 million tonnes of annual blast furnace capacity closures outside of China in the past two months, with the risk of more to come.

That includes 65 million tonnes of capacity from Europe and Japan, which Citi said it expects to crimp demand for seaborne iron ore in the second and third quarters.

“We now expect ex-Asia steel demand to fall 30% y/y in 2Q’20 and 25% y/y in 3Q’20 before rising 4% y/y in 4Q’20, as the weakness in end-use demand, particularly demand for the automobile sector, is expected to persist into 3Q’20 despite the planned restart of factories over the coming weeks,” the note said.

(Reporting by Melanie Burton, editing by Louise Heavens)