Iron-ore is destined to retreat below $50/t next year as supplies go on rising, according to a top forecaster, who has warned that weakening prices will probably encourage the sale of inventories.
The raw material will drop to average $62/t in the third quarter and $59/t in the final three months of this year, before falling through 2018 to a low of $41/t, says Justin Smirk, senior economist at Westpac Banking Corp. Westpac placed first in predicting prices in the first quarter, according to data compiled by Bloomberg.
Iron-ore was whipsawed last month after hitting a near six-month low as investors weighed signals of strength in the largest user, China, including steel output at a record in March, against prospects for rising supply. Top miners including Brazil’s Vale are bringing on new capacity, bolstering seaborne sales, at the same time that miners in China have been reviving production. Smirk says that there has been a huge ramp-up in Chinese supply.
“As supply builds up and prices come off, people will begin to question the wisdom of holding onto inventories,” Smirk says. “The signs are now pushing in one direction: while we’ll get some volatility, the momentum is just on a downward trend now.”
Spot iron-ore with 62% iron was trading around $66.53/t in late April. The commodity – which hit $94.86/t in February – averaged $86/t in the first three months of this year and $72.32/t this quarter.
The outlook from Sydney-based Westpac – which also placed first for forecasting base metals – contrasts with Australia & New Zealand Banking Group’s view that prices will settle between $70/t and $80/t over the rest of this year. Many other banks are pessimistic, including Barclays, which said in a note last month that, while iron-ore may recover in the short term, it will slump towards $50/t by the fourth quarter as fundamentals deteriorate.
Goldman Sachs Group attributed iron’s recent drop to mills destocking, traders being forced to sell holdings as prices began to fall and a decline in steel margins, according to an April 20 report. Early last month, the bank flagged prospects for iron-ore weakness in the second half.
Among the reasons cited by bears for a weaker outlook is the potential for more supply, both from mines in China and overseas. Mainland miners boosted production by 16% in the first three months of 2017, official data showed. In Brazil, Vale posted record first-quarter output as the world’s largest shipper started exports from its $14-billion S11D complex.
Anglo American has added to the picture of rising global production, saying output rose by 21% to 14.8-million tons in the three months to March 31. Operations at its Minas Rio project, in Brazil, are ramping up towards a target of 26.5-million tons a year.
Steel prices in China have been dropping, with the spot price of hot-rolled coil down almost 20% this year, according to Beijing Antaike Information Development. “We’ve also seen steel prices tipped over and margins of steel mills being compressed,” says Smirk. “The whole demand-driven supply shortage late last year that boosted [prices in the first quarter] has actually been reversed.”
There are tentative signs that the stockpiles at China’s ports may be starting to be sold off, according to Smirk. After peaking at 132.5-million tons on March 24, holdings have dropped for four weeks, the longest streak since September, according to Shanghai Steelhome E-Commerce.