Global iron ore price forecast (November 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.
At the beginning of autumn, a relative stability in the global market for iron ore was replaced by a downward trend as the prices for Australian material (fines 62% delivered to Chinese ports) dropped to $48/t CFR, the lowest level since mid-2003 and $3-4/t down from this year’s April and July lows.
In July-September the actual price for iron ore fines 62% was $55/t CFR China. The Metal Expert Consulting’s forecast released in August ($56/t) was quite exact (error – 2%). At the same time, the consensus forecast based on the recent reports of the investment companies differs from the actual figure by $2/t or 4%.
Comparison of iron ore price forecast accuracy of Metal Expert Consulting and industry analysts over the recent year
According to Metal Expert Consulting’s estimates, the global market for iron ore is being affected by a number of factors, which adversely affect the current pricing and market sentiments until at least the end of 2016:
– Decrease in China’s demand
The slowdown of the Chinese economy and demand for finished steel adversely affects the utilization of steelmaking and BF capacities in the country. In Q3, pig iron production was 57 million t, the lowest quarterly level this year. In October China imported 75.5 million t of iron ore, down 12% m-o-m and down 5% y-o-y. In Q1-Q3, Chinese iron ore imports amounted to 775 million t, down 0.5% y-o-y. Iron ore consumption is expected to drop by 3% this year and by another 3-5% next year.
– Persistently strong supply
Despite the decrease in global demand for iron ore, major producers refuse to cut supply. Moreover, they want to maintain or even expand their market share. According to the latest report, in Q3 Rio Tinto boosted iron ore supply by 17 % to 91 million t. Over the first 9 months of 2015 the company shipped 245 million t of the material, while the annual figure is expected to hit a record of 340 million t. In Q3 Vale also posted a record production of 88 million t.
We believe, the Big Four will be able to boost supply only in case small and medium producers, having production costs above current global prices, cut the output. The most likely ones to leave the market are the companies from the USA (strong dollar, high wages and energy tariffs), Canada (high wages and energy cost), India (low-quality material, which needs several-stage processing) and Russia (expensive transportation). Meanwhile, the key candidates to replace the above losers are acting and new companies from Australia, Brazil and Africa, who are quite competitive thanks to low production costs (quality material, cheap workforce and energy) and transportation expenses (proximity to ports, low freight). These market players are likely to be in the left of the production cost curve. For instance, such is Australian Roy Hill (55 million tpy), expected to ship up to 35 million t in 2016, according to different estimates.
The uncertainty in the market is supported by the accident and suspension of production at Brazilian Samarco, the joint venture of Vale and BHP Billiton. The company majors in pellet production (30 million tpy). Vale expects to lose some 12 million t in 2015-2016, while Deutsche Bank’s experts say the asset could be closed till 2019 for the clean-up, legal issues and restoration works. However, we believe this accident will have little influence on the global spot market for iron ore. On the one hand, key buyers of Samarco’s pellets are European producers of steel and pig iron (not China), who will switch to other sources like South Africa, Ukraine, Russia> Sweden. On the other hand, pellets account for just 12% of global iron ore trade. Besides, the material can be replaced by sinter in pig iron production. Meanwhile, pellet pricing traditionally depends on the situation in the spot market for iron ore in China, so the cut in Samarco’s supply will hardly be crucial amid the global excess of iron ore supply.
– Decrease in key suppliers’ production costs
The reduction in the US dollar-denominated costs is the rise in dollar value against the currencies of major global suppliers and the Chinese yuan. Over the past year, currencies of Brazil, Australia, Chile, Ukraine, Russia, Malaysia and Iran have devaluated by 20-50%. This has favoured the competitiveness of suppliers from the above countries in the global production cost curve. Another factor adding to the reduction of costs is a rising efficiency of the Big Four. According to official releases, cost optimization, minimization of borrowed money usage, increase in operational efficiency have brought iron ore production costs at Rio Tinto down to 10 $/t (including taxes, delivery to port and to China – $25/t CFR China by Metal Expert Consulting’s estimate and $15/t ($30/t CFR China) by FMG’s estimate.
So, we believe that as of the end of 2015 the most efficient suppliers’ iron ore production and transportation costs (delivered to China) amount to $30/t (CFR China, 62% Fe). Nearly 90% of iron ore imported to China is being supplied by the companies having production costs as per 62% Fe material not exceeding $50/t (see the diagram). Despite the yuan devaluation, the overwhelming majority of the Chinese mines are in the red and can operate either with the support of the government or the steel departments of the mills these mines are affiliated with. According to Mysteel, China’s iron ore production dropped by 9% y-o-y over Q1-Q3.
Production costs curve of iron ore fines and concentrate producers
With the iron ore quotes falling to new lows, nearly all forecasts of the investment companies released before October have become outdated. To make our consensus forecast, we have used only the most recent forecasts published in the first half of November and in October.
Deutsche Bank, Morgan Stanley and ABARE provide the most optimistic forecasts (maximum or close to maximum in the table below), believing that the iron ore quotes are likely to recover in the next couple of months. At the same time, Credit Suisse, Merrill Lynch, Citigroup and Liberum Capital expect the prices to continue decreasing (minimal or close to minimal forecast in the table below). Most investment companies believe the iron ore quotes will stabilize at about $50/t over the next year and increase to $70/t by 2018 and to $83/t in 2020.
Consensus forecast of global iron ore prices by industry and financial companies, $/t
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 the same 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 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 global price for iron ore will drop to $45/t in early 2016 and recover to $55/t in Q3 2016, with some downward correction to follow in Q4. So our expectations regarding iron ore price developments are between the consensus forecast and the minimal forecast of investments analysts.
Our medium- and long-term iron ore price forecast is based on assumption that iron ore production costs will be adding 3-4% per year in course of the several next years. We believe that recent rises in taxes imposed on mines (in Australia, Brazil, Ukraine, some countries in Africa and Asia) will continue in the medium- and long-term outlook. The majority of ore-exporting states are developing countries, where budgets are being traditionally supported by mineral production taxes in periods of stagnation. Obviously, this will boost production costs (production tax accounts for up to 10% in aggregate production costs).
Higher tax is not the only reason behind the expected increase in iron ore production costs. The growth will also be supported by the following:
– as iron ore production grows, the iron content keeps reducing (first of all in China; India will face this problem in the medium-term too);
– along with the growth of developing countries’ economies, workforce expenses will be increasing as well;
– recovery of energy prices will boost processing and transportation costs.
Meanwhile, the growth of production costs will be somewhat restrained by the new efficient suppliers entering the market, Metal Expert Consulting believes.
Our long-term iron ore price forecast (62% Fe fines) of $90/t CFR China is based on the expected production costs plus the minimally acceptable operational profitability (estimated at 20% for least efficient suppliers being in the right side of cost curve, or at least 50% of the average production costs in the market).
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