mining

Commodity Outlook: Iron Ore

In March 2013, KPMG in Australia released the Quarterly Commodity Bulletin on Iron Ore. In this article, we take a look at the information shared in the Bulletin.

Accurate short term prediction of iron ore pricing is said to more an art than a science, yet many financial institutions and mining companies are making decision on projects with 10 year development time and 30 year life with this price volatility front of mind.

Demand for steel is expected to double by 2050, with this largely driving by the continuing urbanisation of the world’s population.Changes in technology, impact of carbon pricing and increased generation of scrap steel will moderate the proportional demand for iron ore, but most analysts agree it will be above current levels. At this level of demand without new projects, both the Australia’s Pilbara and Brazil’s Minas Gerias current known reserves will be exhausted by 2050.

As low cost hematite deposits run out, sources of iron requiring greater capital investment and operating costs for infrastructure and/or processing will be needed and change the price point.

Just as Chinese steel mills de-stocking gives insight into the effects on short term price of changes in demand, the continued crackdown on illegal mining in India, has given the industry an insight into the dynamics when a substantial proportion of the global trade of iron ore is removed.

Seasonal effects, short term mismatch between supply and demand, commercial decisions all influence spot price, we must have faith that the urbanization trend will continue to drive demand, and profitable long term growth.

Commodity outlook

Spot iron ore prices (62 percent Fe content), which were on a downward path since the fourth quarter of 2011 (4Q11), saw an increase during fourth quarter of 2012 (4Q12). In the previous year, the prices started to first fall in 4Q11 when the industry witnessed a 20 percent drop from a peak of US$175 – 180/t, which it had achieved during the first nine months of 2011. In 4Q12, the prices increased to an average of US$121/t – marking an 8 percent increase on quarter on quarter basis, although 14 percent lower on a year on year basis.

China

China, the largest steel producer in the world, is expected to continue as the most important factor guiding the global iron ore market prices. Sluggish steel production in Chinese steel mills; re-routing of iron ore exports to China that were originally destined for Europe, Japan and Korea; continued destocking by Chinese steel mills and overall weak macroeconomic fundamentals led to a decline in iron ore prices during the first three quarters of 2012. However, prices rose in 4Q12 driven by increased iron ore demand from Chinese steel mills. China’s steel production rose in 2012 driven by the construction of railways, roads and bridges. Further, with China ending its steel destocking cycle in the first quarter of 2013 (1Q13) and moving toward anticipated higher imports, the iron ore prices could rise from December 2012 through March 2013.

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Forecast for 1Q13

Iron ore prices are likely to remain on the downward path for the coming years after increasing during 1Q13. Downward pressure on the iron ore price is expected in the second half of 2013 due to a combination of anticipated lower steel output and continuous supply growth from the major iron ore miners. The global seaborne export volumes are expected to reach a very high level, which is expected to pull down the prices of iron ore. Consequently, the average consensus prices are expected to moderate, with price expected to be US$124/t in 2013, US$115/t in 2014 and US$105/t in 2016. In the longer- term, the same themes still exist in the iron ore market with execution on supply projects continuing to disappoint, and increased expectation from Chinese iron ore imports required to balance the global sea-borne markets.

Supply

On the supply side, production from two of the major iron ore producing regions in the world is expected to decline in 2013 due to regulatory and political uncertainty in those regions.  Production and exports of iron ore from India are expected to decline in 2013 due to continued restriction on illegal mining. With the MB Shah commission expected to release its report on Odisha in early 2013, the exports from the country are expected to be further affected.

West Africa

The West African region, which was being dubbed as ‘the new Pilbara’ and was being considered as one of
the most-important regions for iron ore production in the world, saw Vale’s Simandou project being put on hold and Rio’s Simondou project slowing amid existing political uncertainty in the region.

Medium-term projection

In the medium-term, the growth in supply is expected to outpace that in demand, due to mine expansions and increased production capacity in Australia, Brazil and West Africa (Mauritania, Gabon, Cameroon and Guinea).

Screen Shot 2013-07-04 at 8.12.28 AM Keep an eye out for more on Iron Ore and mining 

David Okwara

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