Debunking the myth on iron ore supply
▊ With such a large project pipeline and robust prices, the market has been assuming supply growth will remain strong and thus market surpluses are generally large from 2015 onwards. However, we feel this is too optimistic and expect the market to remain tight. With conservative supply forecasts, we don’t see the market moving into surplus until 2015, at which time we would expect prices to ease. However, with iron ore in an oversupply of only 38Mt or 3% of total global supply, prices should remain buoyant. We maintain our forecasts of US$130/t in 2014, US$127/t in 2015 and US$121/t in 2016.
We have gone back over historical forecasts of iron ore supply and found that over the past five to six years the market has over-estimated supply by between 100Mt and 450Mt in various years.While there have been unexpected events such as the financial crisis in 2008, which caused demand to collapse within a few months, in general the market has consistently over estimated supply.
Price-cost relationship important
Historically, prices have traded around the 90th percentile of the cost curve (currently at US$96/t) over the medium term. Thus, the size of the market surplus or deficit can also have a material impact on prices. Deficits have seen a price premium over the 90th percentile of between US$40-$80/t, while surpluses have seen this switch to a discount of US$10/t.
Prices to remain buoyant
With a tight market until 2015, we believe prices will remain elevated. As the market enters into surplus in 2015, we would expect prices to ease although remain resilient. With our forecasts at the top end of consensus, we see the market upgrading price forecasts as supply growth disappoints and Chinese steel consumption forecasts are re-based after a strong 2013.
Publish date: 18/09/13