Iron Ore Price Forecast: Falling Below $100 Per Ton?

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With our eyes on where iron ore prices are headed, steel demand will be driven by construction and automotive sectors, and by growth in the manufacturing industries. Catch up by reading Part One of this article here.

As Standard Bank points out, last week’s HSBC PMI results tell us that China’s industrial sector (down to 48.5 from 49.5 prior) continues to contract, the industrial sector makes up 37 percent of the economy, while the services sector, which makes up 46 percent of the economy, is expanding (HSBC PMI at 51 in February from 50.7 prior), with the seasonal property construction uplift forming a key part of this expansion.

Balancing out, that looks like a zero-sum game as far as the “commodity economy” is concerned.

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

More demand drivers, and specifics of an iron ore forecast, below.

Construction has been the key driver for steel demand and although automotive is of growing importance, the ongoing commitment to social housing has remained a key driver of steel demand in China even as the speculative construction boom of 2010/11 slowed, with rising regulation and reduced access to cheap credit.

Social housing levels are expected to reach 7 million units in 2014, up from 6.6 million units last year, Standard Bank says, with a caveat that 4.8 million units will be completed this year, down from 5.4 million units last year.

Also on the slide, fixed asset investment levels for the year are targeted at only 17.5 percent, the lowest level for a decade, compared to about 19.3 percent last year.

What This Means for Metal Buyers

Some quarters are suggesting 62% iron ore prices could fall below $100/ton, but there is some evidence to suspect that may be too pessimistic. The bank estimates that 100-120 MT of high-cost domestic Chinese production lies in the $110-130/ton price range, and if the industry overhang is as much as a net 70 MT, it is not surprising to see iron ore prices tracking in the $110-115/ton range.

A fall below this could prompt loss-making Chinese miners to pull out the market in coming weeks. The only caveat to this could be the degree to which the pollution card comes into play. Some of this Chinese material, while higher cost, is of good Fe content levels and as such does not need sintering prior to use in the blast furnace. If premiums widen (and there is some evidence this is happening) for higher-grade material over lower-grade material, then Chinese iron ore production may continue at current levels.

However, high finished steel inventory levels are going to take some time to clear in a low commodity growth environment. Steel production is therefore likely to slow further before a pickup possibly later in Q2.

There is little to lift iron ore demand or prices, then, during H1 this year, and the best miners can hope is that prices do not slide too much further down.

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

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