This analyst says iron ore prices are going lower — but some ore will go lower than others

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  • China has cut steel production, creating strong demand for better iron ore
  • This has seen a wide price gap emerge between high and lower-grade iron ore
  • CBA expects that to continue, but sees all prices moving lower this year

Iron ore prices look set to fall this year with higher grades likely to hold up better than lower grades, continuing the theme seen in 2017.

That’s the view of Vivek Dhar, mining and energy analyst at the Commonwealth Bank, who says a greater focus on environmental protection in China will likely keep the discount for lower grades elevated compared to levels seen in previous years.

“While we expect that premium [for higher grades] to pull back slightly from current levels, we believe the broad preference for higher grade ores is a structural change in the market,” he says.

“China is looking to improve its environmental protection, which is consistent with the priorities of the Xi administration.”

This chart shows the current price premium for mid-grade 62% iron ore fines over low-grade 58% fines going back to mid-2012.

Source: Commonwealth Bank

In response to curbs on steel production over the Chinese winter — done to help improve air quality in northern provinces — it’s seen mills flock to more efficient higher-grade ore.

While Dhar admits that recent price weakness in lower grades has made them more attractive to mills, this won’t shake the structural preference for high grade ore in the period ahead.

More broadly, Dhar says iron ore prices will likely fall in the year ahead.

“We see [the price of benchmark 62% fines] drifting lower to $55 a tonne by the December quarter as seaborne supply outpaces demand,” he says, adding that “most of those tonnes will likely be higher-grade ore because they come from Vale and to a lesser extent Rio Tinto”.

While that’s his current view, he says that “the supply response to higher prices last year concerns us because it resulted in mostly low-grade ore” being produced, something he admits could create upside pressure on prices for mid and higher grades.

“If Chinese demand surprises us on the upside and we see a repeat of last year, we could see mid-grade ore markets remain tight, helping provide support for the 62% Fe benchmark price.”

The current benchmark price sits at $78.43 a tonne, according to Metal Bulletin.

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