Customized Research and Market Forecasts

Global iron ore price forecast (August 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.

Over the past three months, the situation in the global market for iron ore has been quite uncertain. After dropping to $50/t in April, the process for Australian material (fines 62% delivered to Chinese ports) recovered to $60-63/t CFR in May-June just to fall again to $50/t in July.

The Metal Expert Consulting’s forecast released in April ($50/t) was more pessimistic than the actual price of $58/t, though our estimates of the price-supportive factors proved to be correct. The forecast made by the investment companies and the industry experts ($55/t) was more correct.

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

Q1 15

Q2 15

Q3 15

Q4 15

Actual price

62

58

-

-

Consensus forecast (investment banks) – July 14

104

101

99

99

Metal Expert Consulting – July 14

114

103

105

97

Consensus forecast (investment banks) – Oct 14

87

86

83

86

Metal Expert Consulting – Oct 14

87

82

95

106

Consensus forecast (investment banks) – Jan 15

75

73

71

73

Metal Expert Consulting – Jan 15

67

64

70

71

Consensus forecast (investment banks) – April 15

-

55

53

55

Metal Expert Consulting – April 15

-

50

61

58

According to Metal Expert Consulting’s estimates, the global market for iron ore is being affected by a number of factors now:

1. Continuing decrease in demand

The economy of China, the largest importer and consumer of iron ore is increasingly closer to “the hard landing”. Due to the official data, in Q2 the GDP increased by 7% y-o-y, but many experts put to doubt the credibility of Chinese official statistics. Some investment banks rate the actual GDP growth at 5-6% instead of 7%. The slowdown of Chinese economy is also seen in the steel industry developments: the average daily production of pig iron has been decreasing since April (estimated at 1.87 million in July), while the monthly consumption of iron ore has dropped by 6% since the beginning of the year.

2. Steadily strong supply

Despite the decrease in demand, the largest iron ore producers keep raising the output to increase sales and expand the market share (Australian Rio Tinto, in particular, intends to increase production by 40 million t). Obviously, the increase in the Big Three supply is possible only in case the small and medium companies (with production costs much above current global prices) reduce shipments. First of all, it is Chinese miners who still manage to keep utilization rate at rather high levels (according to Mysteel, some 70% for large companies producing over 1 million tpy) thanks to government’s substantial help as well as the support of affiliated steelmaking holdings. In July, China’s iron ore imports increased by 15% to this year’s highest of 86 million t, which is yet another evidence of demand-supply imbalance and market glut.

3. Adverse impact of stronger dollar and weakening yuan

Since early 2015, US dollar has grown against all major currencies (euro, yen, and pound) by over 5%. The US Federal Reserve System suspended buying assets and announced a rise in interest rate, which encouraged investments into American assets and the related development of the dollar rate. At present, Eurozone and Japan are facing economic challenges, the Chinese economy is slowing down, and so the central banks of countries other than USA cannot afford to tighten the monetary policy. This factor is most likely to have a medium-term impact: according to Credit Suisse, some 70% of investors believe that the US dollar will be strengthening at the fastest pace compared to other major currencies. Accordingly, prices for raw materials (including iron ore) denominated in dollars have a potential for further decrease.

The 5% devaluation of yuan may have some additional influence on the global iron ore price: in early August the China’s central bank did this to raise attractiveness of exports, which is currently low as compared with the products from countries with stronger currencies. So, even if prices for import iron ore are stable, the Chinese steelmakers will have to pay more for the material in national currency.

Meanwhile, price expectations differ as the strength of each of the above factors is uncertain in the medium- and long-term outlook.

The August consensus forecast of iron ore price has been based on the forecasts made by more than 20 investment banks in June-July. Traditionally, we use only the most recent forecasts of the analyst to make our consensus forecast as well as its minimal and maximum range as accurate as possible.

The most optimistic forecasts (maximum or close to maximum in the table below) have been released by Morgan Stanley, Deutsche Bank, ABARE, Commonwealth Bank and Scotiabank, who expect the prices will decrease no longer and will most likely recover to $65-70/t. Meanwhile, Credit Suisse, UBS and Liberum Capital are pessimistic about the price trend (minimum or close to minimum in the table below) expecting the global iron ore prices to drop to $45-50/t quite soon.

The consensus forecast being the average of all recent forecasts says the iron ore price will stabilize at $55-60/t in 2015-2016 to gradually recover afterwards.

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

Q3 15

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

2015

2016

2017

2023

Consensus forecast

53

55

56

56

57

59

57

57

62

79

Maximum forecast

63

65

65

70

63

66

62

65

71

85

Minimum forecast

45

45

45

45

40

40

53

43

50

65

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.

Поквартальный прогноз МЭК до конца 2016 года осуществлен на основании внутренних методик Компании и базируется на методах нелинейной динамики. Мы полагаем, что с конца 2015 году негативный тренд на рынке железной руды сменится восстановлением котировок – с 56 $/т в III квартале текущего года до 78 $/т в III квартале 2016 года.

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 starting from end-2015 the downward trend will cease to be followed by the recovery of prices – from $56/t in Q3 2015 to $78/t in Q3 2016.

Our long-term iron ore price forecast (62% Fe fines) is based on 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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