Customized Research and Market Forecasts

Global iron ore price forecast (October 2013)


Metal Expert Consulting continues to publish open quarterly reports to show its own understanding of the iron ore market development until 2015 and in a long term and compare it with the consensus forecast of investment companies and analysts.

There was no common price trend in the world market for iron ore throughout Q3. In July and August, Australian and Brazilian fines offered to China increased in price by $20-25/t to $137/t and $143/t CFR, accordingly. In September, spot prices went down $3-5/t and they stay at $132-140/t in early October.

The price fluctuations were mainly caused by developments in China, the key consumer.

As mentioned in our previous reports, now there is a necessity of a soft or hard landing for the Chinese economy, which strongly depends on exports and has been increasing by 10% per year, so that the focus can be shifted onto development of domestic consumption. The economic deterioration in the country induces changes in China’s metallurgical sector. According to worldsteel.org and mysteel.net, the leading industry sources, pig iron production in China was stable at 58-60 mt per month in the previous months, down 3-5% from the peak-high volumes registered in H1. During 8 months of 2013, pig iron output totalled 477 mt, up 6% y-o-y. At the same time, global pig iron output excluding China decreased by 2% y-o-y in January-August 2013.

In early Q3, iron ore prices were supported by low stocks of the material. The stocks in Chinese ports reduced from 75 mt to 72 mt (compared to 98 mt in June-September 2012), and customers had their stocks reduced from those enough for one-month operation to three-week ones. In September, though, consumers started to recover their stocks gradually.

During the previous months, the leading investment banks and industry analysts have been revising their forecasts for raw materials, iron ore in particular.

See below for the consensus forecast of iron ore price changes in the short- and medium-term outlooks that Metal Expert Consulting has made based on 35 reports by industry and investment analysts. To get the forecasts, we have adjusted all the available prices to a common benchmark basis – the CFR China price for Australian 62% Fe fines. The forecasts for August-September have been used. As an exception, we have also considered some forecasts produced by investment banks for earlier periods (the reason is their high degree of accuracy, as the results of Q2-Q3 show).

Experts’ forecasts from the reports and research works carried out by the following companies have been taken into account (in alphabetic order): ABARE, ABN AMRO, ANZ, BMO, BREE, CIMB Group, Citigroup Inc., Commonwealth Bank, Credit Suisse, Deloitte Access Economics, Deutsche Bank, ETLA, Goldman Sachs, HSBC, IHS Global Insight, IMF, Investec, J.P. Morgan, KPMG, Liberium Capital, Macquarie Bank, Merill Lynch, Morgan Stanley, National Australia Bank, Numis, RBC Capital Markets, Renaissance Capital, Scotiabank, Standard Bank, UBS, VTB Capital, Westpac, Wilson HTM, World Bank. We have added 2 companies to the range to prepare our consensus forecast (as compared with the July report).

Some 10 of the above mentioned companies provide no long-term forecasts about iron ore prices, therefore the consensus forecast, the maximum and minimum forecasts for the period have been prepared based on 25 indicators.

The minimum iron ore price forecast is offered by Credit Suisse and Westpac, the companies emphasize the probability is strong the raw material supercycle will come to an end as early as in 2013-2014. Same as 3 months ago, the most optimistic forecast is the one made by IHS Global Insight.

Global iron ore consensus forecast by industry and financial companies, $/t

Q3 ‘13

Q4 ‘13

Q1 ‘14

Q2 ‘14

Q3 ‘14

Q4 ‘14

2012

2013

2014

2015

Long-term

Consensus forecast

132

120

120

117

114

113

130

132

118

112

102

Maximum forecast

141

132

138

150

138

142

145

150

159

Minimum forecast

105

105

95

95

90

117

96

88

80

Note. To get the forecasts, we have adjusted all the available prices to a common benchmark basis – the CFR China price for Australian 62% Fe fines.

The use of our own forecasting methods showed great results in Q3. The actual iron ore price was $132/t, which is only $2/t different from the level we suggested in the basic forecast published in early July 2013 (investment companies’ forecast is 9% ($12/t) different from the fact). When a consensus forecast of independent industry analysts was prepared, only the then latest, April-June reports of investment banks were used.

Comparison of iron ore price forecast accuracy of MEC and industry analysts

Q1 ‘13

Q2 ‘13

Q3 ‘13

Q4 ‘13

Fact

147

125

132

-

Consensus forecast (investment banks) – Jan ‘13

133

136

130

122

Metal Expert Consulting – Jan ‘13

146

154

143

143

Consensus forecast (investment banks) – Apr ‘13

147

137

129

121

Metal Expert Consulting – Apr ‘13 (basic scenario)

149

148

143

Metal Expert Consulting – Apr ‘13 (alternative scenario)

128

130

135

Consensus forecast (investment banks) – Jul ‘13

125

120

117

Metal Expert Consulting – Jul ‘13 (basic scenario)

130

132

Metal Expert Consulting – Jul ‘13 (alternative scenario)

115

110

Unlike the previous two reports, this one will consider only one scenario of developments in the world market of iron ore, as Metal Expert Consulting believes that probability of other scenarios is much lower. Metal Expert Consulting assumes that iron ore price dynamics in 2014 will be similar to the trends seen in 2012-2013: prices will increase to $140/t in October-December, then they will slide down to $120/t in H1 2014. In Q3, prices will recover to $130-135/t and reach $135-140/t in Q4. The iron ore price forecast for the medium and long terms has stayed at the previous level.

Same as in the previous reports, Metal Expert Consulting’s understanding of iron ore price outlooks is more optimistic than a consensus forecast of investment companies.

The graph below shows comparison of Metal Expert Consulting’s current 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.

Source: Metal Expert Consulting

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