Financial risk management, solutions and insights company Fitch Solutions Country Risk and Industry Research (Fitch Solutions) has lowered its short-term iron-ore price forecast for this year and 2022 to an average of $155/t and $90/t, respectively.

The firm previously forecasted iron-ore prices at $170/t and $130/t for this year and next – prior to prices collapsing to levels below its expectations – hovering at about $99.8/t in early November.

Fitch Solutions expects iron-ore prices to remain under pressure into 2022 as supply improves and demand growth slows.

In terms of Chinese demand, Fitch Solutions reports that such demand, stemming from the country's V-shaped economic recovery and the government's major stimulus plan in supporting the construction industry, has peaked in the first half of this year.

This happened with the peak seasonal activity for the construction sector during May to June. China's energy crunch has since resulted in declining steel production and thus demand for iron-ore.

While China's energy crunch has started to ease and production curbs on steel are also being lifted gradually, Fitch Solutions does not expect the strong demand impact that had stemmed from stimulus to return in 2022 as construction projects reach completion and the pipeline of new projects narrows, with the Chinese government focusing on tightening credit lines.

As for iron-ore supply, the firm notes that improving production growth from Brazil and Australia has started to loosen tight supplies on the seaborne market, although Brazilian miner Vale will take longer to return to capacity levels prior to the Brumadinho dam collapse incident.

In this regard, persistently weak production from the world’s third-largest iron-ore miner over 2018 to 2020 set the stage for the 2020 price rally, particularly as Chinese steel producers, who have a growing preference for Brazil's high-grade ore, ramped up production and thus demand for iron-ore, Fitch Solutions states.

In its report, the firm points out that Vale announced its confidence in achieving its 2021 iron-ore production guidance of between 315-million and 335-million tonnes; currently working at a production capacity of 330-million tonnes a year.

At the end of this year, Fitch Solutions says Vale’s production capacity should grow to 343-million tonnes a year, 400-million tonnes a year at the end of 2022 and 450-million tonnes a year beyond this.

Meanwhile, in Australia, the firm highlights that Fortescue beat its full-year shipment estimate with a total volume of 182.2-million tonnes in the 2021 financial year (ended June 30), and set shipment guidance for the 2022 financial year at between 180-million tonnes and 185-million tonnes.

Similarly, Fitch Solutions says BHP reported iron-ore production of 253.5-million tonnes for the 2021 financial year (ended June 30), which is at the upper end of its forecast range.

Among the other major producers, the firm reveals that only Rio Tinto painted a dismal outlook in its half-yearly results, warning that shipments are likely to come in at the bottom end of its 325-million-tonne to 340-million-tonne guidance for 2021, at best – requiring a significant ramp-up in output over the next five months.

LONG-TERM OUTLOOK

Looking beyond 2022, Fitch Solutions expects iron-ore prices to follow a multi-year downtrend, as cooling Chinese steel production growth and higher output from global producers will continue to loosen the market.

In the longer term, the firm forecasts iron-ore prices declining from an average $155/t this year, to $65/t by 2025 and $52/t by 2030 – driven by a combination of weaker demand growth and stronger supply loosening the market.

While significantly lower than $155/t this year, Fitch Solutions says the $91/t yearly average its forecasts for the period between 2021 and 2025 will be higher than the 2016 to 2020 average of $78/t.

As for supply growth, the firm expects this dynamic to accelerate as a result of the current high levels of profitability among major global iron-ore miners in the coming years.

Such an event will bring an end to the stagnation that has persisted since iron-ore prices hit a decade-low average of $55/t in 2015, Fitch Solutions says.

As such, the firm forecasts global mine output growth to average 2.4% from this year to 2025, compared with the 2% contraction over the previous five years. This would lift yearly production by 378-million tonnes in 2025 compared with 2020 levels, roughly the equivalent of India and Russia's combined 2020 output.

However, risks to its price outlook lie mainly to the downside, as the Chinese government could engage in even more stringent policies following Evergrande's financial difficulties that could further drive iron-ore demand and thus prices down, the firm says.

In this regard, Fitch Solutions points out that, in April, the government lifted steel export rebates and import taxes in an attempt to slow domestic steel production and iron-ore imports from Australia.

While these will have limited impact on the industry and prices for now (rebates and taxes were minimal at between 1% and 2%), the firm says the Chinese government could enforce additional regulations.