Consultancy firm Fitch Solutions has raised its iron-ore price forecast for this year from $80/t to $90/t.
The firm says the adjustment was on the back of supply disruptions, coupled with strong demand that resulted in a price rally in the second quarter, which pushed the year-to-date average price higher to $92/t.
However, Fitch notes that the iron-ore price rally has reached its pinnacle and prices will now embark on a correction, as exports from supplying countries revive and a weakening yuan dampens Chinese demand for the time being.
“We believe iron-ore prices have peaked and will head lower from spot levels over the rest of the year as supply issues ease and Chinese demand temporarily softens, owing to the current yuan strength, as a weaker yuan makes the ore more expensive.
“While iron-ore prices will see a ‘correction’ in the coming months, we do not expect a strong collapse. Economic stimulus provided by the Chinese government to stabilise growth will keep steel production strong in 2019 and 2020, especially with the re-escalation of the trade war with the US, boosting demand for iron-ore,” Fitch elaborates.
Fitch further points out that iron-ore prices had started the year with a rally as the collapse of a tailings dam at the Córrego do Feijão mine, in Brazil, in January, and the subsequent legal aftermath threatening miner Vale's supply, sent prices skyrocketing.
Before investor sentiment over the mining accident and iron-ore supply could settle, bad weather in Australia led to the closure of important ports following which miners BHP and Rio Tinto revised their production guidance downwards, catalysing further price rallies.
Additionally, fresh sanctions on Iran raised the possibility of additional iron-ore supply being taken off the global market – Iran's iron-ore exports are expected to reach 20-million tonnes this year, hampering investor sentiment again.
Fitch notes, however, that there has, since mid-July, been a revival of exports from Brazil and Australia, while high-frequency indicators show that Chinese inventories have risen over the past three weeks to reach 121 000 t on August 2.
In 2020, Fitch expects prices to hold up as Chinese demand remains strong, as a result of infrastructure project constructions rolling on.
Nevertheless, Fitch says prices will average $80/t, lower than this year, as they will start from a lower base.
Beyond 2020, Fitch maintains that prices will drop to $57/t by 2023, underpinned by a less positive outlook for Chinese growth than in previous years.
Slowing economic growth in China will cause the waning of domestic steel demand, eventually leading to an oversupply of steel on the global market, pushing iron-ore prices downward.
Further, consistent and large margins of major global producers, such as those in Australia and Brazil with cash costs of below $20/t, will incentivise additional output and mining projects, leading to further weakening of iron-ore prices over the next five years.
The firm predicts that India will be the bright spot in terms of iron-ore demand growth as domestic steel production continues to accelerate in the country.