Iron Ore Price Forecast Shows Weakness: What Are the Drivers?

We have not been alone in predicting a fall in iron ore prices during 2014/15 as rising supply from new mines meets a slowdown in demand growth in China, the world’s largest steel producer and largest buyer of seaborne iron ore.

Business Monitor is still predicting this month that we would see a 25% fall in average iron ore prices during 2014 compared to December 2013’s spot price. So far, though, prices have held up remarkably well; on the back of a 7.5% increase in Chinese steel output last year, the benchmark 62% iron ore price, as per The Steel Index, actually rose 5.4% to an average of $135 per ton in 2013 and finished the year steady in the $130-140/ton range.

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Since then, however, it has fallen out of this range and currently is around $124/ton. Is this the start of the falling price trend that we (and many others) have been predicting?

Current price weakness does have some short-term reasons.

Iron ore inventory at Chinese ports is up, because mine supply from Australia has increased with the two largest suppliers, Rio Tinto and BHP Billiton, lifting production by 4.7% and 16.9%, respectively, to add an additional 36.5 million tons between them, according to a Reuters article this week.

On the demand side, a slowdown ahead of the Chinese New Year and seasonal slowdown in construction activity has led to softer steel prices and reduced demand – albeit in most analysts’ view, temporarily.

But an article in the FT adds an alternative view as to why predictions of a price collapse are unlikely and how price support is coming from, of all places, Beijing’s drive to cut pollution.

Writing in the paper’s regular commodities note, Neil Hume, the FT’s commodities editor, says steel mills in China’s Hebei and Jiangsu provinces are under pressure to lower emissions and comply with new air pollution standards following a smog crisis last year in several major cities.

One of the most polluting stages of the steelmaking process is the sintering of iron ore fines, a refining step before the iron ore is added to the blast furnace and one that emits considerable air pollution of particulate matter and sulfur dioxide. Steelmakers, however, have a choice: instead of cheap iron ore fines, they can use slightly more expensive lump iron ore or pellets, both of which can be loaded directly into the blast furnace without the need for sintering.

To be continued in Part Two.

FREE Download: The Monthly MMI® Report – covering the Steel/Iron Ore markets.

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