Thursday 29 March 2012

Rising supply will slowly push iron ore prices down


Wed Mar 28, 2012
* Iron ore prices to fall to $140 in 2014

* China's steel sector is highly over supplied
By Silvia Antonioli
LONDON, March 28 (Reuters) - Iron ore prices will slowly decline in the next few years as steelmakers cut production to cope with overcapacity and more supply comes on stream, Wood Mackenzie iron and steel consultants said on Wednesday at Reuters Mining Summit.

Average annual prices for ore with 62 percent iron content will fall from about $159 a tonne cost-and-freight China in 2011 to $157 in 2012, $155 in 2013 and $140 in 2014, Wood Mackenzie forecast.

"We do see supply and demand becoming more closely aligned over the next 12 months and for a tendency for supply growth to exceed demand growth over the period of 2013-2014," Wood Mackenzie iron ore principal analyst Paul Gray said.

"Prices should fall in anticipation of that."

High prices for the key steelmaking ingredient in the past couple of years have stimulated investment in iron ore mining projects.

Most of the new supply will come from expansion which the big three miners Vale, BHP Billiton and Rio Tinto are undertaking. The new projects being developed in riskier and less developed geographical areas might however suffer heavy delays, the consultants said.

Gray said: "You have got this turning point on the horizon when this wall or wave of supply hits the market. Historically we tend to keep pushing that further and further out because we tend to underestimate how challenging it is to bring on this new supply.

"To some extent the story has changed a bit now because when you look at the new supply scheduled to come on stream a lot of it is in the hands of the major producers who are well financed and well positioned and committed to invest through the cycle almost regardless of prices."

DEMAND GROWTH TO SLOW

While iron ore supply is set to grow relatively quickly, the rate of demand growth from steel makers is expected to fall.

Steel production in top producer China will grow by about 5 percent in the next few years, down from double-digit growth in the last decade, Wood MacKenzie principal steel analyst Patrick Cleary said. This is due to overcapacity in the market which has squeezed the steelmakers' margins and is forcing them to reduce capacity or shut down some furnaces.

"Certainly we can anticipate that some of the plants and equipment that have been shut down, especially in Europe, Japan, Australia, Canada, in the last 12-18 months is not going to come back online," Cleary said.

"China has also been very badly hit by the margin squeeze in 2011 because there is very significant overcapacity in China. We saw that reflected in the rate of steel production and is one of the reasons why the iron ore price has fallen."

Downwards pressure on prices caused by lower consumption in China will be partially offset by its increasing dependency on imports.

Almost 70 percent of the iron ore consumed in China is currently imported, as seaborne iron ore is higher in quality than domestic material and it is often cheaper.

Imports will make up about 85-90 percent of the iron ore consumed in China by 2030, Gray said.

Prices for coking coal, another key steelmaking ingredient, are likely to remains in a $200-215 range in the next few years, according to Wood Mackenzie coking coal consultant Jim Truman.

"Pricing for met coal have been well above fundamentals last year due to the impact of the Australian floods and China's entry into the market as a net importer and the high margins were an incentive for companies to bring on more production," Truman said.

"Now prices have started to calm down gradually and the new projects will help to keep prices down over the next few years. We see a floor at around $200 free-on-board as at around this level imports look more attractive to China than domestic coal."

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