Iron ore industry enjoying 'price bonanza'

By
Monday, February 12, 2018

Stable iron ore prices in the international market are not reflecting the recent decline in steel prices in China, Capital Economics said in a research report on Friday.

"China's imports held up well last year, supported by strong growth in steel production and a preference for higher-quality imported ore. But we expect the iron ore price to also come under downward pressure as weaker Chinese steel demand and prices eventually translate into lower output," the research firm added.

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Iron ore prices dropped below US$77/t on February 9, closing at US$76.46/t due to a slowdown in trading activity ahead of the Chinese New Year holidays, Metal Bulletin said, adding that month-to-date prices averaged US$75.50/t.

Capital Economics' chief commodities economist, Caroline Bain, said in the report that although imported ore might still be preferred on the basis of quality, import demand still looks set to ease back.

"At the same time, we expect steady growth in iron ore supply, notably from Brazil as Vale ramps up output at the S11D mine. Australia's miners also raised output in 2017 and further increases are likely this year. As such, we expect the price of iron ore to drop to just US$55/t by end-2018," Bain added.

Macquire, on the other hand, has forecast that iron ore prices will end the year at US$66/t, after revising earlier estimates of US$54/t for year-end. According to a Platts report on Friday, the bank stated that the upward revision to iron ore acknowledges "China's persistently high steel capacity utilisation rate should keep quality differentials wide," with lower purity grades.

WOOD MACKENZIE

Wood Mackenzie said in late January that the global iron ore industry had started the year in remarkably good shape, with demand for seaborne ore holding up well and miners enjoying their best margins since 2014. But the UK-based consultant firm questions whether the current bonanza can last.

"The big drivers in 2017, Beijing's supply side reforms and commitment to maintaining stable growth ahead of the Party Congress, will have a less pronounced impact on steel and iron ore in 2018 than 2017," the company said in a report.

"Confidence in a 'controlled slowdown' is high but so too are the risks. A key uncertainty is the extent to which steel intensive infrastructure investment can offset slower growth in other sectors."

The firm estimates the iron ore price will hit US$63/t by end-2018, 12% below last year's average of US$71/t.

"But 2017 was full of positive 'surprises' and risk to our 2018 forecast for Chinese steel and seaborne iron ore is currently on the upside," the report read.

The five things to look for in the iron ore industry this year, according to Wood Mackenzie, are intensification of environmental pressures from Beijing, shutdowns and swaps of steel restructuring in China, supply side response to widening price spreads, a turning point in the investment cycle, and tightening industry structure but potential margin compression.

BNAMERICAS MINING SURVEY 2018

One of the findings from the latest BNamericas Mining Survey shows that the commodities price downturn is over, but the super cycle is not coming back.

"Iron ore is the only one of the four metals covered in our survey question on prices that is closing out 2017 at a lower value than it opened the year. The steelmaking metal rose as high as US$89/t early in the year, only to tumble as low as US$54/t, recovering to US$71/t by the end of 2017 (Dec. 26), about 5% lower than the beginning of the year," the survey read.

According to BNamericas, for 2018, like last year, the majority of survey respondents believe iron ore prices will be flat in the coming year. But that majority has shrunk from 69% to 53% and the percentage of respondents who envision higher prices grew from 14% to 31%.

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