What do experts see coming for the iron outlook in 2018? Unsurprisingly, actions taken by China will be key to watch in the coming year.
Iron ore prices surged in 2016, but in 2017 the base metal performed more moderately.
According to Scotiabank’s latest Commodity Price Index, the benchmark 62 percent fines contract averaged $70 per tonne in 2017. Prices hit a high of $76.87 on February 21 before steadily declining to a yearly low of $51.82 on June 9.
The metal recovered through July and August on strong demand from China’s steel producers, who were anticipating government-ordered production cuts over the winter. According to a World Bank report, supply shortfalls in Australia and Brazil also put upward pressure on iron ore prices in the summer.
On September 5, iron ore prices hit $74.03, and then began falling on an anticipated slowdown in Chinese steel production and increasing supply. Prices reached $57.25 on October 11.
Iron ore prices rose through November, and as of December 20 prices were sitting at $70.45. FocusEconomics attributes the recent surge to soaring prices for steel; steel supply is being squeezed by the Chinese winter production cuts mentioned above.
Iron outlook 2018: Shift to better feedstock
As this year’s iron ore price action shows, China’s steel production cuts have had a major impact on the market. In total, steel mills in 28 Chinese cities have cut their blast furnace output by as much as 50 percent to meet air pollution targets set by the government to reduce smog over the winter.
At the same time, mills have begun paying a premium almost five times higher than two years ago for high-quality ore in order to boost margins and comply with government environmental regulations.
Mark Morabito, chairman and CEO of Alderon Iron Ore (TSX:IRON) said in a December release, “China’s bid to reduce harmful emissions is driving an increase in domestic steel mills switching to high-grade iron ore products with fewer impurities.” He believes the company’s Kami project in Canada’s Labrador Trough “is now well positioned to progress into development” due to those developments.
Reuters notes that Vale (NYSE:VALE), Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO), BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) and Fortescue Metals Group (ASX:FMG) control about 70 percent of the world’s seaborne iron ore market. They too have been focusing on high-quality iron ore.
For example, Fortescue said in November that it will aim to deliver over half of its output with over 60 percent iron content, higher than its current iron content of 58 percent. The company initially thought Chinese demand for higher-quality ore would be temporary, but after seeing the discount for its lower-quality products widen by about 31 percent during Q1 2017 it seems to have reconsidered.
Meanwhile, Vale is shifting its focus to high-grade deposits in Northern Brazil’s Amazon region. CEO Fabio Schvartsman also said recently that his company is prepared to unleash up to 50 million MT of spare capacity to balance the market if prices get too high. He is concerned that if iron ore rises too high inefficient producers will come back to the market, risking a repeat of past excesses that led to $1 trillion in value destruction.
Iron outlook 2018: Price predictions
Iron ore prices are expected to average $60 in 2018, according to Scotiabank. Similarly, FocusEconomics predicts that iron ore prices will fall by the end of 2018 “amid ample supply after inventories are restocked.” Panelists polled by the firm see prices averaging $58.70 in Q4 2018.
However, the highest forecast was $66.90 and the lowest was $51, “signaling a large degree of uncertainty.” FocusEconomics notes that the collapse in steel inventories and subsequent rise in prices should lead to higher steel output in mid-March, when the winter production cuts expire.
“A lot will depend on how Beijing focuses and executes on its plan to reduce industrial capacity in the winter,” Scotiabank commodities economist Rory Johnston explained.
“Everyone will be watching over the next 4 to 6 months to see how much capacity is actually idled. How much of that capacity is simply kind of shifted westward away from the major cities as some of the new industrial capacity being built away from cities comes online,” he added.
Johnston continued, “[a] lot of this is shrouded in statistical shadows and it’s going to take a little bit of time to figure out exactly what’s happening and whether or not that’s going to be a repeatable phenomenon every year.”
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.
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