Iron ore pegged to increase over next five years

New data Australian Government data is forecasting a healthy rise for iron ore and coal over the coming years.

In the Resources and Energy Quarterly, by the Department of Industry, Innovation and Science and the Office of the Chief Economist, the report posits an optimistic future and resurgence for the mining industry, albeit nowhere as strong as the previous boom.

“Over the medium term, the outlook for Australia’s exports is moderate,” the report stated.

“Although the prices for Australia’s largest commodity exports – iron ore and coal – are projected to increase, they are expected to remain well below the prices recorded over the past few years.”

It predicted the metal to average around US$45 per tonne over the coming years, becoming less volatile as production is somewhat curbed and oversupply addressed as operators leave the market.

“The volume of metals exported are projected to decline toward the end of the outlook period (2020-21) as older operations are closed,” it stated.

However, it added that “although these closures will provide some support to prices, new low cost capacity being developed, particularly in Australia and Brazil, should limit any price increase.

The metal has staged a turnaround in performance compared to late last year, experiencing close to a 20 per cent rally in a single day, before subsiding to a more sedate price around the US$50 mark, setting a new normal for iron ore.

The positive movement comes as the Port Hedland records new export highs, hitting 39.53 million tonnes in March, jumping 7.9 per cent month on month.

This continued strength is predicted to soon falter, according to market analysts.

Speaking at a roundtable last month, UBS analysts Glyn Lawcock and Daniel Morgan outlined the reasons for the shortlived rally experienced by iron ore earlier this year, and why the metal’s softening to more sustainable levels will be more beneficial for the industry.

According to Morgan, it grows after Chinese New Year due to stockpiling, and the rally itself caught the market by surprise.

“The magnitude surprised the market, it as a stronger rally than expected,” he said.

UBS reports dismissed the strong upwards movement as a flash in the pan, stating it was “based on macro hopes and short-covering with little evidence of fundamentally better demand – yet”.

It stated that the sharp rise and subsequent fall was based on the typical rise following Chinese New Year combined with a predicted growth in the country’s infrastructure and property markets, Morgan adding that the “property market accounts for 40 to 50 per cent of Chinese steel demand”, however  the “latest data doesn’t show an infrastructure lift – yet”.

“The trade signals are not strong enough yet for a sustainable lift in demand,” Morgan said, “prices rallied in hope.”

Morgan pointed to a lower price point for the long term, floating around an average of the mid US$40s per tonne – slightly lower than Australian Government estimates – with UBS data noting: “We don’t see prices sustaining low to mid US$30s for any significant period of time; we believe supply will respond to preserve margins.”

According to the Office of the Chief Economist, the price will rise slightly from the average US$45 per tonne forecast this year to US$56 per tonne in 2017, to a predicated US$61.4 in 2018 through to an eventual US$64.7 in 2021.

UBS warned against the price moving upwards too swiftly, or declining too heavily, with Morgan stating: “Prices can get too low, and the power of the major producers may increase too much, returning the industry to the oligopoly.”

Morgan believes miners are already reducing outputs in order to overcome the oversupply issue, as they “are chasing value over volumes (as previously seen in the market), as there is no point in cannibalising their own earnings”.

However he also warned against the price rising too high, which could act as a catalyst for smaller operators to restart their operations, adding more tonnages and distorting the market without additional demand to support these increased output levels.

When it comes to actual export levels, the growth will continue to be modest in Australia, although Brazil is forecast to ramp up production in the coming five years as its major operations come online.

Australia is predicted to gradually add tonnages to its exports levels, moving upwards 20 per cent in volume from 767 million tonnes last year to an eventual 926 million tonnes in 2021, whilst Brazil is forecast to ramp up dramatically by nearly 40 per cent, from 366 million tonnes in 2015 to a predicted 503 million tonnes in 2021.

 

 

 

 

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.