Customized Research and Market Forecasts

Global iron ore price forecast (July 2014)


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.

In Q2 2014, prices for Australian iron ore fines (62% Fe) kept decreasing in China, they fell to $92/t CFR (bottom-low level within recent 5 years). We believe the main reasons behind the decrease are the slowdown of pig iron and steel production in China, thick stocks of iron ore in consumers’ warehouses and in ports and tightening of credit policy.

According to worldsteel.org and mysteel.net, China’s pig iron output was stable at 60-61 million tpm in the past few months, the growth rate having slowed down to 0.3% y-o-y. Oversupply makes the situation worse: China’s iron ore imports reached a record high volume of 83 million t in April. Despite a 7% decrease in purchases that followed in May, imports of iron ore went up 20% y-o-y to 380 million t in January-May. As a result, iron ore stocks in Chinese ports have been steadily growing this year to exceed 116 million t. Goldman Sachs analysts inform that warehouses in the largest Chinese ports are utilized by 90%, so there is low potential for further stock-building in a short-term.

To prepare the consensus forecast, we have considered independent forecasts published in past two months. Forecasts of investment companies published before June have been disregarded because of a sharp drop of global iron ore prices.

Being positive that iron ore prices stay low, Credit Suisse, Commonwealth Bank, Morgan Stanley, Liberium Capital investment banks offer the minimum forecasts. Meanwhile, IHS, Macquarie Bank, Scotiabank, are most optimistic in their forecasts citing maximum price levels.

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

Q1 14

Q2 14

Q3 14

Q4 14

Q1 15

Q2 15

Q3 15

Q4 15

2014

2015

2016

Long-term

Consensus forecast

125

102

105

105

104

101

99

99

111

103

100

101

Maximum forecast

122

122

118

118

118

118

128

117

116

121

Minimum forecast

91

82

76

76

75

72

101

76

76

85

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

Comparison of actual iron ore prices in April-June ($102/t) and Metal Expert Consulting’s forecast published in April 2014 ($130/t) shows that we have overestimated the market ability to accept the rise. At the same time, forecasts of investment companies differ from actual figures even more (1.5-fold inaccuracy). Meanwhile, the consensus forecast of independent industry analysts published in our previous report was based solely on recent reports of investment banks.

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

-

-

-

-

-

-

Consensus forecast (investment banks) – July’13

118

119

115

113

-

-

-

-

Metal Expert Consulting – July’13 (basic scenario)

130

130

137

135

-

-

-

-

Metal Expert Consulting – July’13 (alternative scenario)

115

105

107

114

-

-

-

-

Consensus forecast (investment banks) – October‘13

120

117

114

113

-

-

-

-

Metal Expert Consulting – October’13

132

121

132

136

-

-

-

-

Consensus forecast (investment banks) – January’14

124

121

117

115

-

-

-

-

Metal Expert Consulting – January’14

131

127

130

132

-

-

-

-

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

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.

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

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. Seeing different prices trends in steel markets, we have adjusted our models accordingly and reached a good correlation in retrospective period (see the graph).

We believe that the most probable scenario of global iron ore market development will be a downtrend to bottom low prices in Q3 ($90-95/t) and their further recovery to $115/t in January-March 2015. Starting from April-June 2015, iron ore prices will be declining again.

Metal Expert Consulting’s expectations of further price developments in global iron ore market in 2014 are in line with the opinions of investment analysts.

At the same time, our medium- and long-term iron ore price forecast is still more optimistic than those of investment companies. We believe that a possible surplus of iron ore related to new capacities and the decrease in steel output (in China, first of all) will be somewhat balanced by the policy of suppliers.

Source: Metal Expert Consulting

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