Iron ore prices neared $100 per MT earlier this year after a strong finish in 2016, but most analysts are predicting a weaker market for the commodity over the next few years.
The metal is a key component of steel, and according to Forbes its recent price rise was driven partially by increased Chinese steel production. While the country’s steel output exceeded domestic demand, steel producers were able to continue producing at high levels thanks to state subsidies and tax breaks.
Those circumstances don’t look set to change any time soon, and oversupply in particular continues to be an issue. Iron ore output from Brazilian mining giant Vale (NYSE:VALE) came to 86.2 million tonnes in the first quarter of 2017, up 11.2 percent year-on-year. BHP Billiton (ASX:BHP,LSE:BLT,NYSE:BHP) recently released its Q1 2017 results as well, indicating a 1 percent year-on-year increase from 2016.
South Africa’s largest iron ore miner, Anglo American (LSE:AAL), also increased its iron ore production in Q1 2017. The company’s results show that output rose by 30 percent year-over-year at its Minas Rio site and 17 percent year-over-year at its Kumba site.
Varying expert opinions
Against that backdrop, many experts are calling for lower iron ore prices. Justin Smirk, senior economist at Westpac, predicts that prices will drop below $50 next year. Smirk accurately predicted iron ore prices in Q1, and he told Bloomberg this week that the metal will average $62 in Q3 2017 and $59 in Q4 2017 before falling to a low of $41 in 2018.
Other similar outlooks abound. A new report from BMI Research forecasts that iron ore will fall to $70 this year, $55 in 2018 and $46 by 2021. Commerzbank’s (OTCMKTS:CRZBY) prediction is less optimistic — the firm predicts that supply will continue to outpace demand, with iron ore prices perhaps reaching $55 by the end of 2017.
That said, there may be some relief in the near term. Analysts with the National Australian Bank have suggested that a supply outage from the damage caused in March by Cyclone Debbie could raise iron ore prices in the short term. Longer term the bank predicts that iron ore will fall to $60 across the second half of 2017 and 2018.
In the long term, investors may also want to keep an eye on the Chinese government’s efforts to curb steel output in the country. It recently revoked the licenses of 29 steel companies that had illegally expanded production or violated state closure orders, reports Reuters. Analysts estimate that China has a surplus steel capacity of 300 million tonnes; the country plans to shed 100 to 150 million tonnes of surplus steel by 2020.
US President Donald Trump’s massive infrastructure investment plan may also be worth watching. If it goes through, it could result in a huge increase in demand for steel and iron ore.
Advice for investors
While the majority of iron ore price forecasts are not positive, some market watchers remain optimistic. For instance, Australia & New Zealand Banking Group said earlier this month that “while some may label this a bear market, the reality is that prices are still 33 percent higher than they were this time last year and well above any levels seen since 2014.”
What’s more, Barclays analysts recently suggested that the “vicious mini down-cycle” in Chinese steel and iron ore prices has created an opportunity in that space. They believe that major iron ore miner Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) is capable of producing large cash returns over the medium term.
Similarly, according to Barron’s Asia, Rio Tinto and BHP Billiton are considered “buys.” That said, it is worth noting that these firms focus on a variety of commodities and not solely on iron.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.