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“For the first time in more than a decade, the need to eliminate iron ore supply, rather than incentivise it, is determining prices,” Roper said in a research note on Monday September 1.
Iron ore prices fell to their lowest levels in five years at the end of August, dropping to less than $89 per tonne cfr China for benchmark 62% Fe material.
A huge ramp-up in output among Australian and Brazilian miners is one of the main drivers behind the price slump, Roper said, with demand for the steelmaking raw material remaining sluggish at best.
CLSA’s average iron ore price forecast for 2014 was $101 per tonne cfr China for 62% Fe iron ore, 5% below consensus price forecasts of $107 per tonne.
The brokerage’s iron ore forecasts for 2015 and 2016 diverge significantly from consensus views, with CLSA predicting average annual prices of $80 and $75 per tonne, as opposed to consensus predictions of $109 and $105 respectively.
Speaking to Steel First in an interview in August, Roper said that rocketing supply and negative demand signals had prompted CLSA to cut its price forecasts.
Slowing property-sector demand in China looks “increasingly serious” for steel demand in 2015, the bank said, adding that risks were also mounting to the downside for steel exports from China.
With prices at these levels and falling, and demand remaining weak, Roper said that hundreds of millions of tonnes of iron ore would have to exit the market as high-cost producers felt the squeeze of a lower pricing climate.
High cost, privately owned domestic Chinese producers will drop out of the market but large, state-owned enterprises will be supported by the government and will remain competitive in the long term, he added.
Upstream, CLSA said that iron ore exports have surged to record highs, with 155 million tonnes of supply growth expected in 2014.
“A further 115 million tonnes of supply [must] exit the seaborne market over 2016 and 2017 to offset new low-cost supply,” CLSA said. “We are concerned that the seaborne cost curve may not prove elastic, as mine owners may have strategic reasons to subsidise production and continue to operate.”
A significant proportion of the hundreds of millions of tonnes of new iron ore supply which has hit the market in the past year has come from increases in capacity by the world’s three largest iron ore miners – BHP Billiton, Rio Tinto and Vale.
Rio Tinto alone was responsible for record production of 139.5 million tonnes of iron ore in the first half of 2014, a 10% increase year-on-year.
New low-cost iron ore from mines such as Anglo American’s Minas Rio project in Brazil, and Roy Hill’s large-scale Australian operation, were due to push another 156 million tonnes into the iron ore market in 2016-17.
CLSA said that, with this volume of new low-cost iron ore tonnage hitting the market, the big story in the commodity would shift from looking at the displacement of high-cost Chinese domestic miners to a focus on the displacement of marginal seaborne supply by sizeable low-cost producers.
A further decline in iron ore prices to levels close to $80 per tonne in the fourth quarter of 2014 will see 200 million tonnes of high-cost ore exit the market, according to CLSA analyst Ian Roper.