By Stuart Burns
By anyone's reckoning, iron ore and coking coal had a stellar year in 2016. Driven by infrastructure investment and a robust construction market, Chinese imports of our iron ore could top 1 billion metric tons for the first time in 2016. Prices more than doubled in the space of 12 months and the supply-demand situation seemed to be largely in balance for much of the year.
After topping $80 per mt in early December, prices eased back a little toward the end of the year, prompting many to ask "have we seen the peak in iron ore prices?" Mills typically cut output during the quieter winter months when construction demand slows. Many steel mills have already curbed output due to chronic smog alerts across northern China.
Seasonally, it would not be unusual if iron ore prices remained subdued up to the Chinese New Year and then picked up in preparation for the peak production months of late spring and summer. But, while Chinese demand defied many expectations of a slowdown in 2016, the recent softening of both iron ore and coking coal raw material prices and the price of some finished steel products over the last week or 10 days, has lent support to some analysts' predictions that we could be seeing markedly lower Iron ore prices throughout this year and next.
Analysts at RBC capital markets said iron ore prices are not sustainable at current levels and they expect a pullback this year. According to Reuters, Australia's Department of Industry, Innovation and Science last week predicted iron ore to average just $51.60/mt this year, easing further to $46.70 in 2018. While a Reuters poll in mid-December put the average price of iron ore at $54.70/mt in 2017, Barclays (NYSE:BCS) predicts prices to tumble as low as $50/mt by the third quarter of 2017.
Domestic iron ore stocks remain at a 2½-year high of around 110 million mt, yet among mining majors such as BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO) confidence remains firm after the Chinese government confirmed plans to spend another 800 billion yuan on its rail network this year.
Much may depend on how the majors manage supply this year. If the major miners chase market share again in 2017 prices could indeed come down, but if demand holds up and the big three, or four with Fortescue Mining Group, can maintain a little discipline then any price falls could stabilize after the Chinese New Year.
Physical iron ore prices were influenced by a rampant futures market last year. At this stage, the interplay of the futures market, physical demand from steel mills, and seaborne iron ore supply has too many variables to predict 2017 and '18 with any certainty, but the rising chorus predicting price falls may be enough to influence investor sentiment at least in the short term.