Customized Research and Market Forecasts

Global iron ore price forecast (October 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 July-October 2014, prices for Australian iron ore fines (62% Fe) kept decreasing in China. They fell to $80-82/t CFR China within past two months (bottom-low level since the middle of the “crisis” year of 2009). We believe the main reasons behind the decrease are imbalance of demand and supply (growth of demand for iron ore slows down in China, while supplies to the global market (from Australia, mainly) keep increasing), and a downturn of global macroeconomic indices (downfall of oil prices, slowdown of global economy growth).

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

Macquarie Bank, Credit Suisse, Numis and Liberium Capital are most optimistic in their forecasts citing maximum prices for iron ore presented in the table below. Meanwhile, Merill Lynch, ETLA, Investec offer the minimum price forecasts, being positive that iron ore prices will decline further. Most investment banks expect global iron ore prices to reach the bottom-low level in Q3 2015.

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

2020

Consensus forecast

120

102

90

86

87

86

83

86

99

86

87

99

Maximum forecast

95

96

96

90

101

102

94

100

114

Minimum forecast

80

80

78

70

78

94

79

76

88

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

The actual global price for iron ore was $90/t in Q3. Inaccuracy of Metal Expert Consulting’s forecast ($93/t) published in July 2014 was mere $3/t or 3%, while consensus forecast of investment companies based on recent reports and data of independent industry analysts differs from the actual figure by $15/t or 17%.

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

-

-

-

-

-

Consensus forecast (investment banks) - October2013

120

117

114

113

-

-

-

-

Metal Expert Consulting - October2013

132

121

132

136

-

-

-

-

Consensus forecast (investment banks) - January 2014

124

121

117

115

-

-

-

-

Metal Expert Consulting–January 2014

131

127

130

132

-

-

-

-

Consensus forecast (investment banks) - April 2014

-

149

153

154

158

159

162

162

Metal Expert Consulting–April 2014

-

130

141

133

120

143

126

128

Consensus forecast (investment banks) - July 2014

-

-

105

105

104

101

99

99

Metal Expert Consulting- July2014

-

-

93

100

114

103

105

97

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 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.

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 most probable scenario of global iron ore market development during the next 6 months will be a downfall of average quarterly prices to $82/t and their recovery to $105/t by late 2015.

Metal Expert Consulting’s expectations of further price developments in global iron ore market in 2015 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 slowdown of steel output growth (in China, first of all) will be somewhat balanced by the policy of iron ore suppliers.

In mid-2014, iron ore production costs of the most efficient suppliers and costs of its transportation to China and SE Asia, the largest customers, were $50-60/t (with the current price being $80/t profitability is 60%). The average level of costs is $75/t CFR China (profitability is 10%). Profitability of many suppliers (especially local iron ore companies in China) is zero or below, so prices cannot be considered fair.

If costs of iron ore production increase by 2-4% per year over next years (inflation, growing labour costs, equipment, electric power and fuel costs, possible tightening of royalties, etc.), suppliers’ costs will increase by at least $10-15/t by 2020. Thus, the minimal operational profitability of 30% (which equals the average market profitability of 60-70%) will be reached at iron ore price of $120/t as forecasted by Metal Expert Consulting.

Source: Metal Expert Consulting

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