There appears to be an almost universal expectation that iron ore prices will soon start to retreat, after surging some 62% through April. They have since eased back but are still up 28% on the year.
Without doubt, much of iron ore’s gains in 2016 have been driven by strong demand from China, with imports up 9.3% to 669.65 million metric tons in the first eight months of the year from a year ago. But prices in Qingdao lost 5.8% in the seven sessions through Wednesday.
That was the longest run of daily declines since March and while steel output remains robust, questions are again being asked as to how much longer prices can remain north of $55 per mt as yet more supply comes on stream. According to the MetalMiner index, finished steel prices have eased this month.
Iron Ore Output
You would expect the miners to refute this and, sure enough, in a Bloomberg report, VALE SA (NYSE:VALE) and Cliffs Natural Resources (NYSE:CLF) said that the impact of the new output won’t be as severe as expected and will see the $50 per mt level holding. Yet banking analysts are not so sure with Westpac Banking Corporation (NYSE:WBK) saying last month that rising supply will drive prices below last year’s lowest point of $38.30, while Citigroup (NYSE:C) expects an average of $45/mt next year.
Morgan Stanley (NYSE:MS) is among those foreseeing weakness, saying last month that prices may tumble back to $40 per mt this half as the approach of winter in China typically blunts steel demand and output. Even top-three miner BHP Billiton (LON:BLT) says prices will probably drop as the under performance of supply this year is reversed over the next 12 to 18 months.
For sure, the loss of Samarco production, BHP’s two-year rail maintenance program, and Rio Tinto's (LON:RIO) delays due to its autonomous train program have all contributed to limit excess supply to the market this year.
China’s stimulus and a surprisingly robust steel market have managed to lift prices this year to unexpectedly strong levels but most of these trends are expected to reverse in 2017 and it would appear investors may already be positioning themselves ahead of that new direction. SGX AsiaClear futures in Singapore have dropped for the past five weeks in the longest run since 2014, and the forward curve shows prices back below $50 per mt in December.
Miners See the Positive
Not all parties, of course, are pessimistic about prices. The Australian Financial Review said the market was surprised by both the increase in Chinese demand this year and the lack of urgency shown by miners toward getting new supply into the market.
Miners were optimistic that prices would hold steady, the article states, but few outside of top iron-ore exporter Australia would agree. What would the impact of falling prices be next year? Lower input costs would feed through into better mill margins if demand remained robust but, generally, demand is not strong and the probability is that lower input costs for aggressive Chinese mills would encourage them to drop export prices and fight for demand in overseas markets, weakening the position for western mills to raise prices in their home markets.
The most likely impact will be to blunt opportunities for European mills to raise prices, while U.S. mills, better protected by tariff and anti-dumping barriers, may be protected from direct Chinese market penetration but would still feel the depressing effect of lower global prices on their home market as imports from elsewhere set the benchmark for the market.