by Stuart Burns
A recent article in the FT speculated that we could be about to see the end of the bull run on iron ore prices. In spite of weakness among all the base metals, iron ore has still averaged $136 per metric ton this year, the second-highest on record. Iron ore demand has been stronger than even the most bullish of projections on the back of strong steel production and Chinese re-stocking.
The FT reports Chinese steel production hit a record annualized rate of 800 million metric tons a year in May and has remained in the 760 million-800 million range since, according to Jefferies, the investment bank. To put that figure in perspective, annual production in 2012 was 717 million tons. Recent developments suggest, though, that the bull run may be about to, if not end, then ease over the next year.
Iron Ore Supply Outlook
On the supply side, massive new investment in Australia is now coming on-stream; Australia alone is expected to add about 140 million tons of new capacity over the next two years. Meanwhile, infrastructure problems in Brazil have been resolved, increasing shipments from huge iron ore miner Vale SA (VALE) .
There is finally the prospect of a resumption of Indian iron ore shipments. For example, the FT quotes Citibank as saying, "The decline in Indian iron ore exports has been an under-appreciated factor in maintaining iron ore prices over the past three years." Here's a mind-blow: two years ago, India was exporting 100 million tons a year of iron ore.
Iron Ore Demand Outlook
On the demand side, steel prices in China are looking fragile in the face of such strong production. Inventory built up this year – increasing by 13 million tons in July and August – could start to be drawn down, reducing buying on the spot market.
Standard Bank is quoted as predicting that prices will drop to below $125/metric ton, while Ric Deverell of Credit Suisse says in the article: "The market is heading into a really big surplus and at some stage over the next couple of years the price will cut through $100 or even $90 and that will force some redundancy on the supply side."