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At the end of 2019, experts were expecting iron ore prices to stabilize during 2020, but the base metal actually ended the year on a high note.
Last year was marked by uncertainty as the coronavirus pandemic hit the world, with base metals markets feeling the impact on demand and supply.
As the new year begins, the Investing News Network is looking back at the main trends in the space in 2020 and what the iron outlook is for 2021.
Iron trends 2020: The year in review
Iron ore prices started 2020 hovering around the US$93 per tonne mark, with the first quarter seeing the base metal hit its lowest point of the 12 month period at US$81.65 on March 3.
Prices took a hit as the coronavirus started to spread around the world, and on the back of concerns surrounding demand from China, which was the initial epicenter of the virus.
COVID-19 disrupted Chinese industrial activity and led to the temporary closure of factories and construction sites across the country, with demand from the steel sector declining as much as 30 to 40 percent in February alone, according to FocusEconomics.
As with other base metals, prices started to rebound in the second half, as economies around the world began to reopen and as China’s demand turned to the green. The Asian country is the world’s top producer and consumer of steel, of which iron ore is a key component.
By December, iron ore prices had climbed to their highest level in four years at US$169.52, for a total gain of almost 85 percent in 2020.
“Sizable stimulus aiming to help the infrastructure sector (in China) shake off the effects of the pandemic has ramped up demand for iron ore,” FocusEconomics analysts said in their December report.
“Industrial output and infrastructure investment growth in the country both posted robust increases in the first month of Q4,” they added.
Moreover, successful coronavirus vaccine trials spurred investor sentiment and led to a more optimistic outlook for the global economy in the second half of 2021, further fueling prices for the commodity.
Supply concerns also helped the price surge, with lower supply estimates from Vale (NYSE:VALE), the world’s second largest iron ore producer; it has curbed its 2020 production guidance and reduced its guidance for the following year. Meanwhile, November shipments to the rest of the world from Brazil, which is responsible for 23 percent of the world’s exports, fell to a six month low.
Iron outlook 2021: What’s ahead
As 2021 kicks off, investors interested in the iron ore space are wondering what’s next for the base metal.
Australia, the world’s top exporter of iron ore, is expecting China’s iron ore demand to remain high over the next 12 months, although Chinese steelmakers may seek to reduce production slightly should iron ore prices remain at a level that renders many of them unprofitable.
Demand in many other countries is expected to stay below 2019 levels, with a range of steelmakers in Europe and South Asia remaining on hiatus or shut down and not expected to produce until iron ore prices drop, said Australia’s Office of the Chief Economist (OCE), a government commodity forecaster.
But Chinese iron ore demand growth may be nearing its end. “Chinese demand for iron is likely at its peak, with a decline expected over the next 10 years as a growing share of its steel production is drawn from domestic recycling. This will result in reduced Chinese dependence on the seaborne iron ore market,” the OCE commented.
Meanwhile, Fastmarkets is projecting that iron ore demand in 2021 will be stronger than initially expected earlier in 2020.
“We not only anticipate continued demand growth in China, but a recovery in the rest of the world as well, with crude steel production resuming in other Asian and European countries,” a report from the firm reads. “As the year approaches the end, it has become clear that the Chinese crude steel output recovery after the lockdown in the first quarter was not just a temporary phenomenon, but it drove the appetite for iron ore persistently higher throughout this year (2020).”
In terms of prices, the high iron ore market prices seen in recent months are expected to continue into the first quarter of 2021, supported by strong Chinese steel output, according to the latest S&P Global Platts iron ore and steel outlook.
Looking further ahead, despite the recent gains, prices for iron ore are expected to decline going forward, as concerns over tight supply fade, according to FocusEconomics.
“While a prolonged health crisis could create bottlenecks, exerting further upward pressure on prices, production in Australia and particularly Brazil should pick up as activity recovers from the pandemic, further adding to swelling inventories,” analysts at the firm said.
“Meanwhile, a slower-than-expected vaccine rollout could weigh on the global recovery, dragging on steel demand and thus on iron ore prices ahead.”
FocusEconomics panelists estimate prices will average US$91.80 in Q4 2021 and US$78.50 in Q4 2022.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Speaking to the Investing News Network (INN) at this year’s Prospectors & Developers Association of Canada (PDAC) convention, Randy Smallwood pointed out that the coronavirus is forcing miners to think about contingency plans and policies, which ultimately is a good thing.
Smallwood, who is president and CEO of Wheaton Precious Metals (TSX:WPM,NYSE:WPM), said, “(Companies should be) making sure that (they’ve) got the proper procedures and policies in place, and that (they) are sustainable through issues like this.”
“I’m most intrigued about the concept of central governments trying to stimulate growth to offset some of the impacts of things like the coronavirus, and that of course bodes very well for precious metals in the long term,” he explained.
Wheaton Precious Metals is a streaming company, meaning it pays companies an upfront fee to acquire all or part of their production, primarily of precious metals. This type of company gives investors less risky exposure to metals output.
The company was able to exceed its 2019 guidance of 690,000 gold equivalent ounces ounces, producing 706,900 gold equivalent ounces. Wheaton expects to average over 750,000 gold equivalent ounces over the next five years, while its silver output will remain stable.
Smallwood is particularly optimistic about palladium, which has been on an incredible price run over the last year and currently is priced just over US$2,400 per ounce.
“With the shift away from diesel engines, palladium is outperforming and outperforming very strongly. And we don’t see an end to it, there’s nothing that’s going to come in,” he said.
“These are real shortages that are impacting the automobile industry in terms of being able to find enough palladium to satisfy the needs — the increased needs — for the catalysts on the gasoline side.”
Smallwood added, “We just don’t see any change in supply. There’s just a definite deficit in terms of commodity out there, and there’s nothing that’s going to change in the next while.”
To hear more from Smallwood regarding the difficulties substituting platinum for palladium in the catalyst industry and what else Wheaton Precious Metals has planned for the year, watch the video above. You can also click here for our full PDAC playlist.
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
At an investor briefing on Monday (December 2) in New York, Vale outlined plans to target net-zero emissions by 2050, aligning the company’s operations with the Paris Agreement on climate change. The miner also set its goal of a 26 percent female workforce by 2030.
Scope 3 emissions, as outlined by the Greenhouse Gas Protocol, include the downstream and upstream emissions that occur in the value chain of a company, including the product’s life cycle from initial manufacturing to commercial use and subsequent disposal.
Vale is not the only major mining company to commit to such targets; BHP (ASX:BHP,NYSE:BHP,LSE:BLT) committed to reducing its greenhouse gas emissions and committing to Scope 3 emissions goals as well.
During the company’s investor briefing, Vale also announced its production estimates for the next few years. The new estimates promise that Vale’s production will climb within the next three to four years.
Vale’s iron ore production dropped significantly this year due to a dam collapse at its Córrego do Feijão mine in Brazil in January, which killed over 250 people and significantly incapacitated the company’s ability to produce iron ore.
The company expects to produce 340 to 355 million metric tons (Mt) of iron ore and 400,000 Mt of copper in 2020, 375 to 395 million Mt iron ore and 430,000 Mt of copper in 2021, 390 to 400 million Mt of iron ore in both 2022 and 2023, and 460,000 Mt copper in 2022 and 480,000 Mt of copper in 2023, respectively.
Since the Córrego do Feijão mine disaster, Vale has taken additional steps to ensure no accident of that scale occurs again, and it will be temporarily suspending the disposal of tailings at the Laranjeiras damn at the Brucutu mine in order to assess the dam’s characteristics. While the dam is suspended, the Brucutu plant will operate at around 40 percent of its capacity.
This year has been a hard one for Vale’s share price, which has dropped by 10.88 percent since January. The stock has, however, made gains these past five days, increasing by 0.17 percent since November 26.
As of 12:00 p.m. EST on December 3, Vale traded for US$12. Meanwhile, iron ore opened markets on December 3 trading for US$88.11 per metric ton. In London, copper traded for US$5,855 per metric ton on December 2.
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Securities Disclosure: I, Sasha Dhesi, hold no direct investment interest in any company mentioned in this article.