Customized Research and Market Forecasts

Global iron ore price forecast (January 2013)


Price dynamics have changed in the global market for iron ore over the past six weeks. After staying virtually unchanged for quite a long time, spot prices for Australian fines (62% Fe) grew to $140/t by late December and then to $160/t by mid-January.

The speculative factor is the key one behind such a substantial rise in iron ore tags, the leading market players and industry analysts believe. Chinese consumers accepted the lift out of necessity to replenish stocks as well as because ore shipments from Australia were hampered by adverse weather conditions and the markets for steel raw materials and finished products seemed likely to get stronger in Q1 2013. In the second half of January, import ore quotations were rolled back in China to $140-145/t, the level recorded in late 2012.

However, the ore price rally had a serious impact on the world analysis and information space. Practically all the leading investment banks and industry analysts updated their medium- and long-term raw material forecasts, with some companies revising the direction of changes.

In the context of the mentioned price uncertainty, Metal Expert Consulting starts to publish open quarterly reports to show its own understanding of the iron ore market development until 2015 and compare it with the consensus forecast of investment companies and analysts.

Metal Expert Consulting’s methodology of forecasting global iron ore prices is based on mixed forecasting methods and includes non-linear dynamics models, demand and supply balance of the global iron ore market, estimate of key suppliers’ costs.

Investment companies’ forecasts have a number of features that should be pointed out:

– analysts often forecast different indicators in the world iron ore market, which complicates comparison of their forecasts (export prices for ore from Australia, India, import prices for China, prices for different kinds of ore with different Fe content). Consequently, even retrospective and actual price indicators may differ considerably;

– as quotations in the global market for iron ore are highly volatile, experts revise forecasts regularly and often extensively. This means that industry analysts’ forecasts should be looked at taking into account the date when the forecasts are prepared and, if necessary, outdated ones should be disregarded. Revisions of iron ore forecasts for one and the same company are insignificant though, while market outlook assessments by different analysts differ more markedly;

– industry and stock market analysts make most of their forecasts for a medium term (3-5 years), indicating the direction in which prices will tend to change in a long run.

Below are several recently prepared forecasts of iron ore price development. Given the above mentioned surge in ore prices at the end of 2012 and the beginning of 2013, Metal Expert Consulting considered only the forecasts revised in December 2012 at the latest. The September forecast of Morgan Stanley is the only exception, as it seems to be still relevant now.

Global iron ore price forecasts of industry and financial companies, $/t

Source

Forecast basis

Date of update

2012

Q1

Q2

Q3

Q4

2013

2014

2015

Long-term

2013

Goldman Sachs

Iron ore 62% Fe, CFR China

Jan.13

130

n/a

n/a

n/a

n/a

144

126

90

80

Standard Bank

Iron ore - Indian fines spot to China

Jan.13

127

125

140

133

140

135

125

115

n/a

Deutsche Bank

China imported fines (62% CFR)

Jan.13

124

n/a

n/a

n/a

n/a

125

115

110

80

ABARE

Iron ore fines from Australia

Dec.12

128

n/a

n/a

n/a

n/a

106

n/a

n/a

n/a

Morgan Stanley

Iron ore, FOB Australia

Sep.12

139

n/a

n/a

n/a

n/a

153

140

130

110

World Bank

Iron ore fines (62%), spot, CFR China

Jan.13

128

n/a

n/a

n/a

n/a

130

132

135

150

Westpac

Australian export price FOB

Jan.13

120

135

175

175

110

149

150

n/a

n/a

Citigroup Inc.

Iron ore Fines, Australia

Jan.13

125

135

120

110

115

120

122

122

n/a

Macquarie Bank

Spot 62% Fe iron ore China

Jan.13

130

140

140

130

130

130

125

115

80

Credit Suisse

Iron ore fines – 62% (China CFR), dry

Jan.13

128

130

125

115

110

120

100

90

90

CBA

Iron ore spot (62% cfr China)

Jan.13

149

n/a

n/a

n/a

n/a

117

119

115

86

Merill Lynch

Iron ore (Fe 63.5%, fines)

Jan.13

125

145

124

114

114

124

111

n/a

n/a

ANZ

Iron ore Spot (CIF China, fines)

Jan.13

125

115

120

124

127

122

129

125

n/a

Consensus forecast

Iron ore fines (62% Fe, CFR China)

130

133

136

130

122

129

125

115

97

Max- forecast

Iron ore fines (62% Fe, CFR China)

130

145

183

183

140

157

158

135

150

Min-forecast

Iron ore fines (62% Fe, CFR China)

130

115

120

110

110

106

100

90

80

The graph shows comparison of Metal Expert Consulting’s price forecast for Australian iron ore fines (62% Fe) in the Chinese market with the level of prices that investment and industry analysts expect adjusted to this basis.

Metal Expert Consulting’s quarterly forecast for the period until late 2013 is made based on the Company’s internal methodologies with the use of non-linear dynamics methods. This year, the situation in the iron ore market is predicted to develop largely the same way it did in 2010: tags will continue growing into Q2 (an upturn in the global market for finished products as compared with H2 2012, decrease in ore stock levels at Chinese ports, additional demand rise in the ore segment due to import substitution). The iron ore market is expected to become oversaturated in H2, sending quotations down to $140/t CFR China.

Metal Expert Consulting’s medium-term price forecast for the iron ore market is somewhat above the consensus forecast of investment companies, which is attributable to a number of reasons.

The scenario suggesting an increase of 3-4% yearly in global steel production in 2013-2015 (particularly, slower growth of the economy and steel consumption in China) is taken as the main one in the forecast for the global economy and global steel markets. According to Metal Expert Consulting’s estimates, on the back of an increase of 50-60 mtpy in global steel production iron ore consumption will accordingly rise by 80-100 mtpy, and the probable rise in import substitution in China (local pig iron and steel producers are expected to cut raw material purchases in the home market, to import larger volumes of higher-quality and cheaper ore form affiliated assets) makes it likely that iron ore demand in the world free market will grow by at least 100 mtpy.

At the same time, amid relatively unfavourable conditions in the global markets for raw materials and steel seen since 2012, investments into the iron ore segment have dropped drastically. As a result, most of the iron ore production projects planned earlier have been put off until 2014-2015 or mothballed indefinitely. Currently, over 60 projects to produce iron ore are planned to be started in 2013-2015, their total capacity being 625 mt, including 340 mt the big four miners account for (BHP Billiton, Rio Tinto, Vale and Fortescue Metals Group). A significant part of other projects are funded by Chinese and Asian companies, which makes their implementation more probable.

So, iron ore output has potential for adding over 200 mt yearly in 2013-2015 due to new capacities. However, when the global ore market sees a price decline, the leading ore suppliers (the big four) usually not only cut investments into ore mining but also avoid increasing ore shipments, and so a conclusion can be reached that if all the projects involving Asian investments are launched the rise in ore supply will only slightly outstrip the ore demand upturn and will not lead to a serious glut in the ore market. Therefore, annual prices are not expected to be adjusted by more than $10/t.

The long-term price forecast appears important mainly because of the estimate of a “fair” price level “cleared” from speculations. It is based on future relationship between demand and supply, suppliers’ possibilities of cutting costs incurred during production and transportation to the major consumers; another important factor is who of market participants will have production costs that will serve as “the support level” for market prices.

Unlike most of investment banks, Metal Expert Consulting does not expect that coming of new suppliers with lower costs (against the market average), strengthening of competition and decrease in the key suppliers' profitability may force average annual prices below $100/t in the long term. In early 2013 costs of ore production and transportation to China and SE Asia, the biggest outlet, stand at some $50/t for the most efficient of the existing suppliers (their profitability is about 150%), with the cost average for the market approaching $70/t CFR China (profitability is 90-100%). If iron ore production costs are assumed to go up 3-5% yearly in the next 10 years (inflation, growing labour, equipment, electricity and fuel costs, possibly toughening royalties and taxes on subsoil use, etc.), suppliers’ minimal costs will gain at least $20-25/t by the end of the period. As a result, the operating profit of 50%, which we consider minimal, can be earned if ore is priced at $120/t, the level that Metal Expert Consulting forecasts.

Source: Metal Expert Consulting

© 2004-2017 Metal Expert LLC, all rights reserved Back to top