Iron ore & steel price analysis and forecast for Q4 2015

Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Oct 2015.

Below is the iron ore and steel report, to read the full report covering all the metals in pdf form click here.

Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.

Iron Ore and Steel – Supply increasing

 

Summary
Iron ore prices reached a low in July of $44.10 before rebounding to around $60 in mid-September on restocking in China. Weak steel prices mean steel mills have little room to chase iron ore prices higher; higher prices have prompted ore shipments to rise so iron ore prices are falling again. Shipments from Brazil, where the weaker real has incentivised more exports, have risen. With the iron ore majors lifting output while demand for steel is weak, prices are likely to head lower again. We expected prices to trade either side of $57 in the third quarter; we now look for prices to trade either side of $50 in the fourth quarter.
Iron ore chart - Iron ore price 62 CFR Tianjin
Iron ore table - Chinese iron ore required to balance the market

Overall trend – Iron ore prices have rallied some 25 percent in recent months, which seems out of sync with the fundamentals, but this was driven by restocking and some disruptions to shipments from Brazil. With the Brazilian real losing ground again, the country has a bigger incentive to lift exports. Generally, stronger supply growth is likely to keep iron ore prices under pressure – oversupply will force prices lower while producers fight for market share and, in some cases, survival. The ramp-up of new output – a feature of the market since last year – is set to continue for the next few years. Although we still expect Chinese steel demand to grow (and given the size of its economy, even a slower growth rate equates to a lot more metal consumption), the slower rate suggests that producers have overestimated demand. As well, heightened turmoil in Chinese markets of late is also likely to hit business confidence in China and emerging markets, all of which could see global growth slow further.

Steel output still falling – Global steel production in the first eight months of this year was down 1.4 percent on the same period in 2014. Chinese output fell two percent over the same period but was down 3.5 percent in August on August 2014. But lower output has not supported prices – demand for steel in China has fallen further. China’s apparent crude steel consumption fell 5.2 percent in January-July from the same period in 2014, according to the China Iron & Steel Association. This supply surplus, along with various trade restrictions, are likely to limit exports, which in turn is likely to force further cuts in Chinese steel production and thereby demand for iron ore.

Iron ore supply changes – The downturn in iron ore prices has prompted closures and cuts – an estimated 240 million tonnes of iron ore has been curtailed in recent years. But this has not been enough to cause a supply shortage – the iron ore majors continue to bring on new capacity with cash costs of production of around $15-$20 per tonne. Since this is comfortably below current iron prices of around $55, it looks as though steelmakers can look forward to lower raw material prices, especially with oil and coal prices also low. This should keep steel prices under pressure even if demand picks up – there seems to be no shortage of steel capacity. Still, prices rarely move in straight lines so we would expect periods of higher prices along the way when users restock, as indeed was the case between July and early September.

Steel and iron ore hit by double-whammy – The slowdown in China could not have come at a worse time for iron ore producers – steel production and consumption are slowing down while iron ore capacity is soaring. The iron ore producers always knew their combined capacity increases would ultimately push iron ore prices lower as they won market share and forced higher-cost producers out of business, but the slowdown in China and the contagion from that could well keep the iron ore and steel industries in the doldrums for much longer than the industry probably expected. In recent years, China has been keen to diversify its sources of iron ore but recent developments mean it has, by default, become more reliant on Australia and Brazil, which may sit uncomfortably. So we would not be surprised if Chinese companies get more aggressive in trying to buy iron ore producers, especially if iron ore producers’ share prices continue to weaken. This could lead to a smaller ‘open’ seaborne market in the years ahead.

Steel prices – Weak demand, oversupply, falling raw material and energy prices as well as competition from cheaper imports – especially where currency differentials are taken into account (i.e. the weak Brazilian real, the rouble, some emerging market currencies) – are all forcing steel prices lower. Anti-dumping legislation may help stop the slide but it will probably take more production cuts to bring about lasting change.
Iron ore table - regional steel prices

Steel prices continue to trend lower in Europe and Asia – demand is weak and supply remains relatively strong while producers benefit from lower raw material costs and weaker oil/coal prices. North American prices have been more stable, which is a sign of the stronger economy.

Iron ore chart - expected changes in iron ore exports 2013-2016
Australian producers are set to supply the lion’s share of new iron ore, with Brazil also a significant supplier, all while other countries lose market share. Some of these companies may well become takeover targets, especially if share prices get too damaged.
Iron ore chart - movement in forward curve

The iron ore swap forward curve has steepened – the run-up in iron ore prices between July and early September and deteriorating outlook prompted forward selling. The forward curve fits our outlook for iron ore prices.
Iron ore table - Global steel output and 12 month moving average

Global steel output has started to fall, with output in recent months dropping below its 12-month moving average. Lower production may ultimately underpin steel prices but is not going to do anything to help iron ore prices.