Gloomy mood in iron ore not lifting anytime soon
Source: www.chinamining.org Citation: www.scmp.com Date: October 22, 2015
Iron ore prices which have been battered by rising low-cost supplies from Australia will likely see more pressure next year given stagnant demand and additions to an already bloated supply, analysts say.
"Iron prices are likely to fall further since the supply surplus is set to worsen more while demand has been falling," Li Xinchuang, president of China Metallurgical Industry Planning and Research Institute told the annual CHINA MINING Congress and Expo in Tianjin.
Lily Shao Yuhan, the iron ore consultant of energy and resource industries consultancy Wood Mackenzie projected prices to bottom out around 2017 before recovering to levels similar to current prices by 2020.
Paul Butterworth, the research manager of steel and raw materials in commodities consultancy CRU, is a bit more optimistic.
"Prices will likely rise from 2017 onwards, as displacement [of high-cost supply] requirements diminish, [production] costs rise again amid recovering oil prices, and the market slowly moves back towards a balance," he said.
Average iron ore prices at mainland ports fell 43 per cent year-on-year in the year`s first eight months to US$63 a tonne, and hit a trough of US$45 a tonne early July, according to China Iron and Steel Association (CISA) data. Iron ore is the key ingredient in making steel products.
The price drop has been blamed on rapid output expansion by the world`s big four miners - Australia`s Rio Tinto, BHP Billiton and FMG, and Brazil`s Vale.
Wang Yingsheng, CISA`s deputy secretary general, said last year the big four raised output by 120 million tonnes, forcing smaller players and higher-cost producers - including many on the mainland - to cut theirs by 100 million tonnes.
This year, the big four have added 100 million tonnes, while others have cut by 80 million tonnes.
The figures suggested a worsening glut in the 2.5 billion tonne-a-year market, of which around half is seaborne supply, mostly to the mainland.
Australia and Brazil`s share of mainland China`s iron ore import market have risen to 83 per cent in this year`s first-half from 65 per cent in 2010, according to CISA.
Shao forecast their share to reach 94 per cent by 2020, as they displace more mainland high-cost output.
Global iron ore production cost has fallen 25 per cent since 2013 thanks to currency depreciation, cost reductions and closure of high-cost mines, she added.
Mainland iron ore output dropped 9.6 per cent year-on-year in the year`s first eight months to 885 million tonnes. Low iron content, around half that of Australian ore, is the main reason for mainland ore`s high production cost.
On the demand side, the mainland, which consumes and produces around half the world`s steel, has seen consumption decline since July last year.
It dropped 5.5 per cent year-on-year in this year`s first eight months, after falling 3.2 per cent last year, amid the nation`s switch in focus from fixed asset investment-led to consumption-led economic growth.
In a report, ANZ`s analysts cited steel producers they visited as saying that Chinese steel demand has likely peaked, and that the real estate market - a key consumer - is unlikely to improve due to oversupply, while infrastructure spending has been slower than pledged.
"Steel exports will likely remain high until anti-dumping duties bite over the next six to 12 months, keeping iron ore and steel prices depressed," ANZ said. "Mounting steel mill losses are expected to trigger material capacity closures, which would signal the floor in steel and iron ore prices sometime mid-next year."
Mainland steel mills collectively recorded a net loss of 18 billion yuan in the year`s first eight months, of which 12 billion yuan was booked in August alone, CISA`s Wang said
Mainland steel export jumped 26.5 per cent year-on-year to 71.9 million tonnes in this year`s first eight months amid falling domestic demand, triggering trade friction with rival producing nations that have seen job losses and plant closures.
China contributed 82.9 per cent of the world`s iron ore demand growth between 2000 and 2013, according to Li.
Shao said "there is no next China" since while India has good potential to be a large customer with annual net import potentially reaching some 150 million tonnes due to rising real estate and infrastructure demand, it far trails China`s demand for imported ore that amounted to 526 million tonnes in the year`s first eight months.
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