The iron-ore price has been on the rise since the end of last year, mainly because of production shortages, as miners have reduced their output over the past few years, says international commodities consultancy Core Consultants MD Lara Smith.

This is also owing to the high steel demand in the Chinese domestic market as well as a shortage of supply in the seaborne market. “The steel output rose by 5.2% year-on-year in the first seven months of 2018, which started boosting iron-ore prices.”

Meanwhile, many Australian miners had production losses, owing to the impact from the tropical cyclone Veronica. The ban on Brucutu mine – mining company Vale’s largest mine in Minas Gerais, in Brazil – using its tailings storage dams resulted in the miner losing production, which also resulted in a slightly negative period for iron-ore majors, she adds. 

“I do not see the iron-ore price reaching the record highs of $191/t in 2011 or even the $160/t we saw about seven years ago. The main challenge is that supply deficits are driving up these prices, rather than demand-led increases. The low iron-ore stocks, cyclones and the dam disaster at Vale’s Feijao mine, in Brazil, in January are all short-term factors.”

Smith expects that the iron-ore price will not increase to more than $100/t in the long term. For this year, it is forecast to increase to about $130/t and then decrease to about $90/t by the middle of next year, and then to about $70/t by the end of 2022 – which reflects a good margin for producers.

Further, the increased political risk in China has made it increasingly difficult for speculators to gauge the fundamentals that have affected the future of the iron-ore volumes on exchanges such as the Chinese futures exchange’s Dalian Commodity Exchange.

The US-China trade war, which led to the implementation of steel tariffs in June 2018, has driven and increased the need to hedge, and has attracted speculators. This, in turn, has resulted in a higher trade volume on the Singapore Exchange and makes it more difficult for physical traders to carry out hedging activities, she explains.

“One of the risk factors with any liquid, exchange-traded metal is that when there is a boom in prices, it attracts speculators and day traders, besides others . . . The problem is that when the market turns, they unwind their positions, so the market goes down even further and much quicker than it otherwise might have. This is one of the things to watch out for,” Smith advises.

South African Focus

Smith says South Africa is not really competitive in the iron-ore market or in many of the other major commodities such as platinum group metals and coal.

“From a cost perspective, we find that about 45% of iron-ore projects’ competitiveness in South Africa are in the lower quartile when benchmarked globally.”

In other words, the country is not globally competitive in a commodity that is imperative for South Africa - especially considering that more than 90% of the mined iron-ore in South Africa is haematite which puts the country in an enviable position - with administered costs, such as labour costs, electricity and logistics, resulting in a lack of competitiveness, says Smith.

South Africa’s productivity competitiveness has dropped over the past five years while other countries have made gains in productivity, she adds.

Further, global trends, such as the transition to clean energy, could dampen demand for South African mining commodities. China is also focused on developing downstream supply chains and improving technology output, rather than simply infrastructure – although there is an announced infrastructure plan. This could also shift focus away from demand for South African commodities, Smith underscores.

While South African policy has dampened its mining sector, there is some policy certainty after Mining Charter III was implemented, says Smith.

“The policies implemented since 1994 have been altered every few years and have not achieved what a change in policy framework should achieve: more jobs, macroeconomic growth and more stable communities. If we focus on redistribution and transformation, a transformed industry should achieve these outcomes.”

Meanwhile, China’s steel industry, which consumes the majority of South Africa’s iron-ore, has been transformed over the past few years with a series of policy implementations such as rooting out illegal mines, increasing efficiencies, production quotas and forced downstream integration, she says.

Smith stresses that while some of China’s steel mills are unprofitable, they are far more robust and can cope with the volatility of raw material prices much better than they did during the last bust in the iron-ore market in 2011.

“The opposite is true for South Africa. Nevertheless, the potential exists for South Africa to shock investors to the upside, as local projects have been discounted so much by the market.”