Iron ore will never recover former peaks

If the iron ore market wasn’t tough enough already, there’s a new forecast out that will have mining executives turning in their sleep: iron will never pass the key $US100 a tonne threshold again.

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That’s the prediction of ANZ’s head of commodity research Mark Pervan who said a recent trip to China has shown him conditions in the sector are more challenging than previously thought.

"The super-high profits enjoyed by the iron ore sector over the past three to four years appear to be over."
Shane White, Senior Production Editor

Iron ore prices around the globe are currently hovering at six-year lows. The price of the commodity, used primarily in steelmaking, has fallen around 45 per cent so far in 2014. Despite this softness, producers continue to maintain output at high levels, which Pervan has argued has led to a damaging oversupply

If Pervan is right though, that’s about to get worse. ANZ has cut its 2015 forecasts on the iron ore price by 22 per cent to $US78 a tonne and said the halcyon days of prices above $US100 are unlikely to be repeated. 

“The super-high profits enjoyed by the iron ore sector over the past three to four years appear to be over as the sector moves from its recent investment phase to a production phase,” Pervan said in a note to ANZ clients. 

“Big low-cost producers now seem keener on bedding-down dominant market share in an increasingly challenging environment. The dynamic is two to three years ahead of our expectations but it means our forecasts for near-term iron ore prices are too high.” 

The dark outlook comes as Citi also cuts its price outlook to a level even more severe than ANZ. 

Noting the current selloff is “driven by weak demand and deleveraging,” Citi has cut its two-year price forecast from $US80 a tonne to $US65 a tonne and current quarter forecast to $US78. 

“While the first half of the year saw prices driven lower as supply increased, Q3’s selloff was driven by deteriorating demand and deleveraging of traders and Chinese mills, with prices now selling off on APEC and pollution driven steel production curtailments,” Citi said in a note. 

“We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness.” 

Speaking to ABC Radio, Pervan said the move was motivated by a recent China trip on which noted a decline in the state of the broader market, including a depressed real state sector. 

"It's fallen quicker than expected. I think most participants have been surprised by the speed of the falls. It is really the lack of rebound we're not seeing in the market which is the reason we have become a lot more bearish." 

In some positive news, both Citi and ANZ expect price to experience a mild recovery in 2016-17 as Chinese conditions start to improve. 

“However, a prolonged global surplus position late into the decade suggests prices are unlikely to breach $US100/tonne again,” Pervan said.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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