Iron ore stockpiles at ports in China will probably expand in the coming months as mills in the top supplier are forced to reduce steel output while supplies from mines increase further, hurting the outlook for prices that have lost 25 percent this year.

Inventories may increase by about 10 million metric tons through to the year-end, according to Colin Hamilton, head of commodities research at Macquarie Group Ltd. That could lift holdings to about the highest since May, according to Bloomberg calculations.

Iron ore is headed for a third annual drop after BHP Billiton Ltd. and Rio Tinto Group in Australia and Brazil’s Vale SA boosted low-cost production while demand growth slowed in China. The port inventories, which are tracked as one gauge of demand in the largest user, climbed by 3.8 percent in the three months to September, snapping four quarters of declines. Global seaborne supplies are poised to expand this quarter with inaugural exports due from Gina Rinehart’s Roy Hill mine in Australia’s ore-rich Pilbara.

‘Least Resistance’

“Chinese steel production is likely to be cut -- they are losing too much money, while iron ore supply remains quite robust,” Hamilton said by e-mail. “Near term, the path of least resistance for prices is down,” he said, forecasting an average of $52 this quarter.

Ore with 62 percent content delivered to Qingdao fell 5.2 percent to $53.14 a ton on Friday, the lowest level since July 27, and was unchanged on Tuesday, according toMetal Bulletin Ltd. It averaged $54.86 last quarter. Financial markets and many businesses in China are closed through Wednesday for a week-long national holiday.

Holdings at ports rose 2.3 percent to 82.4 million tons on Sept. 25, the highest level since July, according to the latest weekly estimate from Shanghai Steelhome Information Technology Co. A 10 million ton increase, as seen by Hamilton, would lift the stockpiles to 92.4 million tons, the most since May 1, according to the Steelhome data.

‘Downside Risk’

"Overall, we believe iron ore prices have greater downside risk than upside,” Jessica Fung, an analyst at BMO Capital Markets in Toronto, said by e-mail. “We still think supply volumes will outpace demand growth in the near term. We are forecasting $50 a ton for Q4 average."

Data last week showed record exports through Australia’s Port Hedland in September and a rise in cargoes from Brazil to the highest this year. The Australian government last week raised its forecast for the country’s exports this year to 762 million tons from 748 million as Roy Hill begins shipments.

The rising supply comes as steel output in China is contracting, with many mills losing money as steel prices slump and growth slows. The World Bank this week reduced its gross domestic product forecast for China to 6.9 percent from 7.1 percent for 2015, with adeeper slowdown seen next year and 2017.

“China’s growth outlook remains depressed and the subdued market sentiment throughout the remainder of the year could see prices trade under pressure going into 2016,” said Kash Kamal, a senior analyst at Sucden Financial Ltd. in London. “A combination of slowing steel production and consumption and increasing iron ore capacity will swing the fundamentals further out of balance.”

BHP gained 1.6 percent to close at A$23.88 in Sydney on Tuesday, paring its loss this year to 13 percent, while Rio rose 1.4 percent and Fortescue Metals Group Ltd. surged 5.9 percent. The trio are Australia’s three biggest shippers.