Customized Research and Market Forecasts

Global iron ore price forecast (January 2015)


This year, Metal Expert Consulting continues to publish 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, there has been no change of trend in global iron ore prices as the benchmark (Australian 62% Fe fines to Chinese consumers) kept decreasing to drop below $70/t by the end of the year, which is close to the pre-crisis low of mid-2009.

Apart from adverse situation in global economy (drop in oil price, slowdown of growth), the iron ore prices are negatively affected by the imbalance of demand and supply.

In H2 2014 domestic demand for finished steel in China, the largest iron ore consuming country, reduced to bring the annual figure down by 1% to 2%, by different estimates. Meanwhile, the country’s steel production growth slowed down as well (according to Worldsteel, the growth amounted to a mere 1%, with Q4 showing the lowest results) being supported solely by the increase in exports.

While iron ore demand in China has actually stopped growing, supply of the material in the global market keeps increasing. In 2014, exports of Australian iron ore rose by 20% y-o-y (up 130 million t to 733 million t), of Brazilian material – by 3% (up 10 million t to 335 million t), of African material – by 10% (up 10 million t to 112 million t). In December, China’s iron ore imports increased by about 30% m-o-m to a record high 87 million t (in 2014, imports increased by 14% y-o-y to 930 million t). Iron ore stocks in Chinese ports that reduced from 115,000 t in September to 100,000 t by the end of the year are likely to increase soon and depress prices.

Continuing decrease in iron ore prices have adversely affected the accuracy of most investment companies’ forecasts published prior to December. So, while preparing our consensus forecast, we have considered only those published in December or early January.

The most optimistic forecast belongs to Commonwealth Bank, Macquarie Bank and IHS Global Insight (equal or close to maximum in the table below) expecting the iron ore price to recover in the nearest months. Meanwhile, analysts of CIMB Group, ETLA, Liberium Capital, RBC Capital Markets believe global prices for iron ore will stay at current lows or even decline slightly (their forecasts are equal or close to minimum in the table below). Most investment banks expect global prices for iron ore to recover in Q1 and stabilize at $70-73/t till the year end.

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

Q1 15

Q2 15

Q3 15

Q4 15

2015

2016

2017

2023

Consensus forecast

75

73

71

73

73

75

81

86

Maximum forecast

86

85

86

90

86

94

100

101

Minimum forecast

65

60

60

60

61

64

69

78

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

In Q4, actual iron ore price was $75/t. The inaccuracy of Metal Expert Consulting’s forecast published in October 2014 ($88/t) and consensus-forecast of investments companies generated on the basis of recent reports differ from the actual price by $11-13/t, which speaks of high degree of market uncertainty.

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

Q1 14

Q2 14

Q3 14

Q4 14

Q1 15

Q2 15

Q3 15

Q4 15

Fact

120

102

90

75

-

-

-

-

Consensus forecast (investment banks) – April 14

-

149

153

154

158

159

162

162

Metal Expert Consulting – April 14

-

130

141

133

120

143

126

128

Consensus forecast (investment banks) – July 14

-

-

105

105

104

101

99

99

Metal Expert Consulting – July 14

-

-

93

100

114

103

105

97

Consensus forecast (investment banks) – October 14

-

-

-

86

87

86

83

86

Metal Expert Consulting – October 14

-

-

-

88

87

82

95

106

The graph below shows the comparison of Metal Expert Consulting’s actual price forecast of 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 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 raw materials and steel products market analysis, are being continuously improved and adjusted to changing market conditions.

Metal Expert Consulting’s quarterly forecast until the end of 2015 is based on the Company’s internal methodologies with the use of non-linear dynamics methods. We believe that the current market is in the state of uncertainty. The most probable scenario (assumed as the main scenario) of global iron ore market development during the next 6 months suggests that existing trends will preserve, while the average quarterly prices will decline to $64/t to recover to $70/t by the end of 2015. Metal Expert Consulting’s expectations of further price developments in global iron ore market over the next 6 months are in line with the pessimistic forecast of investment analysts (minimal forecast), to be completely equal to the consensus forecast afterwards.

Meanwhile, we have adjusted the model of our medium- and long-term iron ore price forecast by attaching more weight to the factor that considers the ability of iron ore suppliers to reduce price and profitability.

According to our estimates, as of early 2015, iron ore production and transportation costs of the most efficient suppliers to China were $40-45/t (CFR, 62% Fe). Meanwhile, some 90% of total volumes delivered to China are supplied by companies whose production costs do not exceed $55/t in terms of 62% Fe fines (see the diagram below).

While building the production cost curve, we have excluded the Chinese producers due to the following reasons:

- in 2014 most Chinese mines were suspended or heavily subsidized being below profitability threshold (domestic iron ore 62% Fe production dropped by 20% y-o-y to 300 million t);

- imports keep rising: foreign suppliers with lower production costs (including many Australian and African companies affiliated with Chinese steelmakers) are ousting local producers. Judging by the development of global prices at the end of 2014, it is evident that the Chinese iron ore suppliers’ costs are higher than prices, and solely foreign suppliers’ costs, whose share in Chinese markets will keep growing, should be considered in pricing.

While making the long-term forecast, we have assumed that the production costs of major iron ore suppliers will be adding 2-3% per year in the coming years due to inflation, growing labour, equipment and energy expenses, rising royalties and taxes, etc. At the same time, new efficient suppliers will be entering the market (from Australia, Africa, South America) to oust the existing market participants (from Russia, Ukraine, Canada, etc.) and restrain the growth of average cost level.

Our long-term forecast for 62% Fe fines at $85/t CFR China is the expected production cost plus the lowest possible profitability (assumed at 30% for least efficient suppliers in the right part of production costs curve or at 50% of average production costs).

Source: Metal Expert Consulting

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