The 2014 Metals Outlook: Iron Ore

Australian Mining has investigated the current state of Australian metals and looks into how they will perform in the coming year. In the fourth part of this five part series we look at iron ore. 

Iron ore spent the last few years as the darling of the mining boom.

It was also the main factor in the rapid decline of the boom as prices spiralled quickly, taking much of the investor confidence with it.

This in turn dragged the rest of the industry down as investors rapidly departed.

But now it has seen a revival and stabilisation, so where will the sector head now?

Upwards, according to IBISWorld, iron ore miners, and analysts.

“Following a large revenue decline in 2012-13 due to price falls, industry revenue is expected to rebound in 2013-14 by 13.6 per cent to $67.2 billion on higher output and price increases,” IBISWorld said.

“This will be despite increases in iron ore output worldwide and slower economic growth in developed and developing economics.”

JPMorgan also saw positive forecasts for 2014, stating that it is unlikely to tumble like 2012.

In Australia we’ve already begun to see this revival as Australian iron ore miners added another $65 billion totheir value over the last half of the financial year at a time when the sector typically expects price to fall.

Mount Gibson Iron was up 111 per cent since June 30, Arrium climbed 93 per cent and Fortescue Metals Group rose 92 per cent, while Port Hedland posted a number of record months, peaking at 25.2 million in October with the port’s general manager John Finach stating that “we’re expecting further targets, uptrends for the next year and we’re forecasting about 320 million tonnes of port throughput for the 2013/ 2014 financial year”.

China has played a major part in this upswing, with Deutsche Bank strategist Xiao Fu explaining that China has been restocking after record levels of iron ore imports over the past few months

“We expect the pace of restocking could slow; however, we are still below the 2011-12 (inventory) peaks, which suggests that the restocking cycle could last for another two or three months,” he said.

Fortescue Metals Group chief Nev Power said iron ore inventories at Chinese ports have been limited for many months, meaning purchasing has to go on to keep the steel mills going.

“We don’t see the same environment that created last year’s drop,” Power said at the Diggers & Dealers conference in Kalgoorlie earlier this year.

“There were very high stocks in both the steel mills and the ports last year, and this year we are seeing below average port and mill stocks,” he said.

IBISWorld stated that in 2013-14 industry profit is estimated to be around $20 billion, with the industry forecast to generate about 2.8 per cent of Australia’s GDP”.

“The industry is expected to continue growing strongly over the next five years through 2018-19, as production volumes increase and prices stabilise then decline to boost demand.”

It went on to state that although we have seen an annualised growth rate of 13.6 per cent for 2013-14, following a decline of 10.6 per cent in 2012-13, we will see a continued growth rate over the coming years of 6.3 per cent for 2014-15 which will leap again to 9.1 per cent in 2015-16, but will not, in the next five years, reach into double digit growth again.

At the height of the boom iron ore recorded a growth rate of 56.4 per cent.

As touched on by analysts and miners, iron ore is tied to Chinese demand and will be heavily influenced by their steel trends as well as price negotiations with the Japanese.

However, overall “industry output is still expected to increase at an annualised 6.7 per cent in the five years through 2018-19 to 88.37 million tonnes”.

“A weaker Australian dollar is also expected to benefit domestic miners over iron ore producers in other countries.”

Despite this prices are not looking overly optimistic.

“After peaking at an average of US $167.76 per tonne in 2011, global iron prices slipped to around US $125 in 2013, with further falls forecast through 2019 to US $106.71 per dry tonne.”

However Credit Suisse had a gloomier outlook for the commodity’s immediate price future, stating that it will dip to around US$ 115 per tonne by the end of this year, and may even fall as low as US$ 90 by the end of 2014.

Ongoing skills shortages will continue to push up wage rates, adding to the sector’s pain and shorting profits.

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