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Iron Ore Price Forecast - Australia’s Department of Industry, Innovation and Science

Steel News - Published on Fri, 12 Jan 2018

Image Source: asn.au
Australia's Department of Industry, Innovation and Science in its latest Resources and Energy Quarterly report forecast that iron ore price forecast to gradually decline following short-term support. It said "The iron ore price is forecast to average USD 53 a tonne (FOB Australia) in 2018, and decline to average USD 49 a tonne in 2019. The iron ore price is expected to experience some ongoing volatility in early 2018, as the market responds to uncertainty regarding the impact of winter production restrictions on iron ore demand."

China's winter curtailment policy should result in a net loss of steel production, in turn, dampening iron ore import demand and placing downwards pressure on the iron ore price. However, the iron ore price has historically tracked China's steel prices quite closely and the price is unlikely to experience substantial declines while steel prices and margins remain prices and margins remain elevated. With steel prices and margins close to six-year highs and inventories at eight-year lows, it is likely that there will be robust growth in steel production and iron ore demand after the winter production restrictions are lifted. Demand for iron ore is also expected to be supported by a seasonal rebound in construction and manufacturing activity in China's spring months. The iron ore price has been revised up from the September 2017 to average US$55 a tonne in the first half of 2018, reflecting short-term support from these drivers However, beyond the first half of 2018, the iron ore price is forecast to decline to US$49 a tonne, reflecting growing supply from low-cost producers in Australia and Brazil, and moderating demand from China as steel production eases. China's steel production is sensitive to a range of economic, monetary and environmental policies, and government policy remains the key uncertainty underpinning the outlook for the iron ore price.

An expected decline in steel prices over the next two years is likely to alleviate some of the downward pressure on lower grade ores, which experienced an average 35 per cent discount on the 62 per cent (premium grade) benchmark price in the December 2017 quarter. However, there are strong signals from the Chinese government that there will be an increasing emphasis on efficiency and addressing air quality concerns, supporting an ongoing preference for medium and high grade ores. As such, while the discount may narrow as steel prices decline, it is unlikely revert back to the historical average of 13 per cent.

China's iron ore imports increased by 5.7 per cent in the year to October, supported by robust steel production. China's demand for iron ore is forecast to gradually ease over the next two years, with opportunities from the "One Belt One Road" initiative expected to partially offset the impact of slowing fixed asset investment and a cooling property market. China's iron ore imports are forecast to remain largely steady, at around 1.05 billion tonnes to 2019, supported by a forecast decline in domestic iron ore output. China's iron ore is mostly low grade, making domestically produced iron ore less competitive against imports, particularly as steel mills increasingly prefer higher quality iron ore. There are also government plans to cancel a third of iron ore mining licenses, predominantly from small, polluting mines, which should further weigh on domestic supply. However, China's iron ore operations tend to be highly responsive to prices, and there is potential for domestic iron ore production to decline slower than expected, which would result in lower import demand than currently forecast.

India's iron ore exports have surged in 2017, though from a low base. The rise was driven by more supportive government policies, including the easing of mining and export restrictions. India's iron ore exports are forecast to moderate over the next two years. India's rapidly growing steel industry is expected to consume more domestic iron ore and exports will be weighed down by ongoing production and export restrictions and a 30 per cent tax on medium grade iron ore exports. The government reduced export taxes for low grade ores in 2016, however there has been a growing preference for medium and higher grade ore from steel mills in China. India's iron ore imports are forecast to remain low through to 2019, domestic output largely satisfies local needs. The outlook for India's iron ore trade is sensitive to government policy, which has historically been more supportive of securing low cost inputs for the steel industry

Strong growth in Brazil's iron ore exports will be driven by the ongoing ramp up of Vale's 90 million tonne S11D project. In its September quarterly report, Vale's production guidance of 360-380 million tonnes in 2017 was unchanged from the previous quarter, and a longer term target of 400 million tonnes a year was reaffirmed. Anglo American Plc's Minas Rio expansion aims to increase annual output from 17 million tonnes to 26.5 million tonnes by 2019. However, ongoing delays in obtaining environmental permits puts the project at risk.

Rising iron ore prices in the last couple of years has resulted in increased iron ore production from smaller producers, however, this is likely to be temporary. Exports of medium grade ore from low-cost producers in Australia and Brazil are forecast to grow, placing downward pressure on the iron ore price and displacing higher cost and lower grade supply

World trade in iron ore
World trade in iron oreUnit2016 s2017 f2018 f2019 f2017 f YoY2018 f YoY2019 f YoY
World tradeMt1.5361.5731.6041.6302.42.01.6
Iron ore imports
European Union 28Mt1471521571583.13.00.9
JapanMt130126132133-3.24.50.9
ChinaMt1.0251.0481.0491.0512.30.10.1
South KoreaMt727478793.84.71.9
IndiaMt46111358.395.912.3
Iron ore exports
AustraliaMt8088348808943.25.41.7
BrazilMt3743844004242.64.26.0
IndiaMt2228121230.0-57.50.0
UkraineMt3947474820.40.32.5
 

Notes: s Estimate; f Forecast
Source: W orld Steel Association (2017); International Trade Centre (2017); Department of Industry, Innovation and Science (2017)

Iron ore outlook
WorldUnit20162017 f2018 f2019 f2017 f YoY2018 f YoY2019 f YoY
Prices be
- nominalMt53.584.352.848.820.2-18.3-7.2
-real dMt54.684.351.548.717.7-20-9.2
AustraliaUnit2015-162016-172017-18 f2018-19f2016-17s YoY2017-18f YoY2018-19f YoY
Production
- Steel hsMt55.355.285.286.8-1.10
- Iron oreMt838872.4909.9924.24.44.31.6
Exports
SteelMt0.7710.950.9830.2-53.7
- nominal valueASm59887578174346.3-12.9-2.4
- real value hiASm82089378172743.9-14.7-4.6
Iron oreMt785.8818.2888.98834.18.21.6
- nominal valueASm47.79982.88982.03952.23131.2-1-15.8
- real value iASm49.81883.97982.03951.08928.9-3-17.7
 

Notes: b fob Australian basis; c Spot price, 62 per cent iron content basis; d In 2017 US dollars; h Crude steel equivalent; Crude steel is defined as the first solid state of production after melting. In ABS Australian Harmonized Export Commodity Classification, crude steel equivalent i ncludes most items from 7206 to 7307, excluding ferrous waste and scrap and ferroalloys; In 2017–18 Australian dollars; f Forecast; s Estimate

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Posted By : Sanju Moirangthem on Fri, 12 Jan 2018
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