Maintaining its iron-ore price forecast at an average of $70/t for the year and $50/t for 2018, research firm BMI says its predicted price drop is influenced by China’s economic refocusing away from heavy industry.
“This will dampen demand for iron-ore,” the firm says, adding that, when combined with simultaneous elevated global supply, this would put a lid on prices in the coming years.
Iron-ore prices will remain on a long-term gradual downtrend during the forecast period to 2021 as iron-ore production oversupply will persist, owing to expanding output from major producers, including global resources company BHP Billiton, global mining company Rio Tinto, Brazilian mining major Vale and Australian iron-ore company Fortescue Metals Group.
In addition, the price resilience seen this year will slow consolidation among high-cost iron-ore producers, namely in China, which will result in a prolonged global iron-ore supply glut.
“Despite this, we expect consolidation to ramp-up over the coming quarters as muted revenues continue to force higher-cost producers to pursue a strategy of divestment of high-cost assets and retrenchment. “We remain cautious towards equities of iron-ore miners, despite the fact that equities will continue to outperform prices over the years,” says BMI.
The firm adds that, although overall mining company earnings would benefit from gradually higher mineral prices in the coming years, the broad-based surge in mining equities over the past 12 months has already priced in most of the good news for the sector.
“Nevertheless, we expect equities of major miners such as Vale, Rio Tinto, BHP and Fortescue Metals Group to outperform iron-ore prices, as well as juniors over the years, owing to their low cash costs and increasing efficiencies, which will largely buoy investor sentiment. While falling prices will eat into their profitability levels, these miners will still remain substantially profitable until at least our iron-ore price forecast period to 2021,” says BMI.
In South Africa, the country’s coal and iron-ore sector will continue to be dominated by multinational mining company Anglo American. The company is the largest coal producer, the largest iron-ore producer through its subsidiary Kumba Iron Ore, and the largest platinum-group metals producer through another subsidiary, Anglo American Platinum.
“However, Anglo American is keen to offload the majority of its South African assets, which could result in a significant decline in the country’s iron-ore production growth,” BMI notes.