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Credit Suisse sees iron ore prices remaining higher for longer

Photo: Oleg Nikishin/Getty Images

Iron ore markets look set to remain higher for longer as a combination of strong steel demand, higher margins and firm output levels in China acts to support prices well into 2018.

That’s the view of Matthew Hope, Research Analyst at Credit Suisse, who has upgraded his iron ore price forecasts not only for 2018 but also 2019 and 2020 this week.

Here’s his new forecasts comparing those previously offered.

Source: Credit Suisse

“We have revised our seaborne iron ore price forecasts, and our supply-demand balance,” says Hope.

“We upgraded prices for a more positive outlook for China and ex-China steel output that should lead to more robust iron ore demand, greater profitability of China steel mills, more conservative supply forecasts from the big four iron ore producers, and a view that supply will drop rapidly at iron ore prices below $50 a tonne.”

On the demand side of the ledger, Hope says that while new infrastructure projects in China are likely to decline in the period ahead, he expects projects under construction or already approved to keep steel demand buoyant next year.

“China’s steel demand in 2016 and 2017 was supported by infrastructure investment growth of around 20% per annum, and a property construction boom. In 2018, the outlook for these two sectors is perhaps less positive, but we believe steel demand for the next couple of years will be supported by the backlog of infrastructure and property projects already approved and funded,” he says.

“New projects may slide, but existing projects and those about to start should maintain robust demand.”

And, adding further support, Hope says that high steel prices and low steel inventories should help to underpin iron ore demand once restrictions on Chinese steel production are lifted in mid-March next year.

“Steel demand has been artificially lowered in northern areas over winter on halts to construction projects. But when spring comes, we expect a surge of demand as all the stalled projects restart. With depleted steel inventories from reduced output across winter, steel prices should be strong through this period,” Hope says.

“Steel mills want to benefit from high steel prices and will seek to ramp production rapidly once the blast furnace constraints are lifted on 15 March. We expect they will restock with high grade iron ore ahead of the restarts. With a month or more delay before delivery of spot cargoes, we expect strong demand of seaborne iron ore from February, and forecast prices to climb to $70 a tonne. in the first half of 2017.”

Hope says that Chinese steel producing capacity could be reduced by a further 30–35 million tonnes next year, helping to support steel prices, and in all likelihood, medium to higher grade iron ore demand.

On the supply side of the equation, Hope says that a combination of ongoing market surpluses, supply growth and the likelihood that Chinese steel demand will weaken in the coming years will eventually weigh on iron ore demand, seeing supply drop as lower prices prompt high-cost producers to exit the market.

“In 2019 and 2020, higher ore supply and softer demand growth, should see the iron ore price settle towards the marginal cost,” he says, adding that the marginal iron ore supply breakeven price is somewhere in the low $50 a tonne region in his opinion.

“The big four producers with delivered costs as low as $26/dmt [a dry metric tonne] comprise 70% of ore supply. But costs rise rapidly in the remaining 30% of the cost curve where producers lack the advantages of bulk tonnage and dedicated infrastructure.

“As the steel demand growth softens, steel prices should ease, margins unwind and iron ore prices hand back rent and settle into the cost curve to put marginal operations under pressure.”

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