Customized Research and Market Forecasts

Global iron ore price forecast (April 2015)


Metal Expert Consulting continues publishing open quarterly reports to share its understanding of the iron ore market development in a medium- and long term and compare it with the consensus forecast of investment companies and analysts.

No upward corrections have been seen in the global market for iron ore throughout the first months of the year. In early April, the iron ore benchmark (price for Australian iron ore fines 62% Fe to China) dropped to $50/t CFR China, the level last seen in 2003, due to excessive supply along with the decrease in demand in China, the largest consumer, who keeps cutting steel production by 1.5-2% y-o-y.

Most industry experts have not expected prices to fall so sharply. The Q1 average of spot iron ore benchmark was $62/t. The Metal Expert Consulting’s forecast released in early 2015 differs from the actual figure by $5/t, while the inaccuracy of consensus forecast made by investment banks exceeds $13/t or 20%. While Metal Expert Consulting forecast the price to go below the Q4 2014 level (75 $/т), the consensus forecast of investment banks predicted no decrease. Meanwhile, the actual price was even below the minimal forecast of investment analysts ($65/t).

Comparison of iron ore price forecast accuracy of Metal Expert Consulting and industry analysts over the recent year

QI 15

Q2 15

Q3 15

Q4 15

Fact

62

-

-

-

Consensus forecast (investment banks) – July 14

104

101

99

99

Metal Expert Consulting – July 14

114

103

105

97

Consensus forecast (investment banks) – October 14

87

86

83

86

Metal Expert Consulting – October 14

87

82

95

106

Consensus forecast (investment banks) – January 15

75

73

71

73

Metal Expert Consulting – January 15

67

64

70

71

To prepare the April consensus forecast of iron ore price, we have considered only forecasts published by banks and investment companies since early April. The most optimistic short- and medium-term forecasts have been released by Morgan Stanley, Citigroup, CIMB and Euromonitor International (maximum or close to maximum in the table below), who expect the prices to recover by mid-2015. Meanwhile, Credit Suisse, UBS and Liberium Capital believe the global iron ore prices will keep decreasing (minimum or close to minimum in the table below). The consensus forecast of investment banks envisages a gradual recovery of global iron ore prices starting from Q3 2015.

Consensus forecast of global iron ore prices by industry and financial companies, $/t

Q2 15

Q3 15

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

2015

2016

2017

2023

Consensus forecast

55

53

55

57

58

59

61

56

59

67

81

Maximum forecast

67

67

67

66

70

71

72

66

69

79

90

Minimum forecast

45

45

45

45

45

48

50

50

48

50

70

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

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, and estimate of key suppliers’ costs. These methods, repeatedly tested in course of analyzing the markets for raw materials and steel products, are being improved and updated in line with the market changes.

Metal Expert Consulting’s quarterly forecast until the end of 2016 is based on the Company’s internal methodologies with the use of non-linear dynamics methods. We believe that the most probable scenario of global iron ore market development (the main scenario) will be a reversal of price trend in mid-2015 (price to bottom out at $50/t in Q2 2015) followed by a recovery to $60/t in H2 2015 and to $70-80/t in 2016. So, Metal Expert Consulting’s expectations of medium-term price developments in global iron ore market are in line with the optimistic forecast of investment analysts.

Our long-term iron ore price forecast of $85/t CFR China for 62% Fe fines is the expected production costs plus the minimally acceptable operational profitability (estimated at 30% for least efficient suppliers being in the right side of cost curve, or at 50% of the average production costs in the market).

The graph below shows the comparison of Metal Expert Consulting’s actual price forecast for Australian iron ore fines (62% Fe) in 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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