Australia's industry department has slashed its iron ore forecast to $US45

But not that kind of Slash… Photo: Scott Gries/Getty Images

Australia’s Department of Industry, Innovation and Science has slashed its iron ore forecast for 2017, suggesting that “prices are expected to recover more slowly than previously forecast”.

According to its June quarter Resources and Energy Report, the department now sees the iron ore price averaging $US44.80 a tonne, 20% below the $US56 forecast it offered just three months ago.

“The revision is based on the assumption that loss making operations may continue to produce for longer than previously expected. It also factors in increased supply from India and additional cost savings reported by iron ore producers,” said the department.

“The outlook for iron ore prices is sensitive to the length of time that companies can operate at a cash loss. As financial losses accumulate there will be greater pressure to close high-cost capacity.”

Partially contributing to downside price pressures, the department sees Australian export volumes continuing to grow, thanks largely to increased output from the nation’s largest producers.

“Australia’s largest iron ore operations are low cost and are expected to remain competitive at prices below US$50 a tonne in 2017,” said the department.

“Australia’s iron ore export volumes are estimated to have increased by 6 per cent in 2015–16 and are forecast to increase by a further 8 per cent in 2016–17, with minimal risks to the outlook.”

Courtesy of the forecast price downgrade and small lift in export volumes, the department estimates that iron ore export revenue will fall slightly by 0.6% to $A49 billion.

Given the relationship between Australia and China, the largest seaborne exporter and the largest source of end demand globally, the department predicts that Chinese import demand will also increase, although warned of three key downside risks.

“China’s imports of iron ore are forecast to increase by 2.1 per cent to 974 million tonnes in 2016 and by a further 0.7 per cent to 981 million tonnes in 2017 because of declining domestic production,” it said.

“There are three important downside risks to the outlook for China’s iron ore imports.

“The first two are the potential for China’s steel production to fall faster than anticipated or for domestic iron ore production to decline slower than anticipated. The third risk is the potential for China to make more of its steel in electric arc furnaces—which use scrap steel and require much less iron ore,” it says.

The table below, supplied by the Department of Industry, Innovation and Science, shows the departments price and Australian production forecasts for next year. The prices used are in US dollar terms and are based off the spot price for 62% fines, excluding freight rates.

On Thursday the spot rate for benchmark 62% fines closed at US$55.07 a tonne, including freight costs, according to Metal Bulletin. In free on board (FOB) terms, that used by the department, that currently equates to US$50.37 a tonne.

Forecasts offered by treasury in May’s federal budget had the average FOB spot price for 2016/17 at US$55 a tonne.

Based on sensitivity analysis conducted by treasury, it estimated that a $US10 per tonne reduction in the iron ore price would result in a $A6.1 billion decline in nominal GDP in the 2016/17 fiscal year.

You can access the Department of Industry, Innovation and Science’s report here. It’s got plenty of charts and analysis, and not just for iron ore but also coal, crude, base and precious metals along with LNG.

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