The Australian government is bullish on the outlook for iron ore pricing

Photo by Mark Kolbe/Getty Images

An increasing supply of iron ore, predominantly from Australia, is forecast to drive prices down in 2015 and 2016 in the seaborne market although, over the medium term, prices are projected to rebound as higher cost producers exit the market and world steel production growth rebounds.

That’s the bullish outlook for iron ore offered by Australia’s department of industry, innovation and science in its September quarter resources and energy update, released today. The bureaucrats are forecasting that prices will rebound each and every year between 2017 to 2020.

Despite a ramping up of seaborne production from Australia and Brazil, and falling steel production globally, the government’s optimistic outlook appears pinned to the assumption that Chinese high-cost iron ore miners will cease production at the same time steel production accelerates. Many iron ore miners will no doubt be praying they’re right, as well as Treasury.

Here’s the assessment offered by the government:

“In 2017, the price of iron ore is projected to increase to US$57.70 (in 2015 dollars, FOB) as demand growth accelerates and supply growth slows. Projected growth in world steel production in 2017 will support consumption of iron ore while industry consolidation is projected to remove some of the excess supply capacity. These factors are expected to support an increase in the price of iron ore to US$67.20 (in 2015 dollars, FOB) in 2020. However, China’s residential construction growth rate remains a key area of uncertainty and is a considerable risk to the price of iron ore.”

So the department see risks to its forecast, based on uncertainty over the rate of residential construction in China, and also suggests one of the key factors behind its bullish call – the closure of high cost, low margin Chinese iron ore mines – is also not guaranteed.

“The viability of China’s iron ore industry, which produces high cost concentrate, presents one of the key risks to the price of iron ore over the medium term. If the government implements market based reforms, China’s domestic production of iron ore is likely to fall, which will increase import requirements and provide support to the seaborne price of iron ore over the medium term”.

So the iron ore price will increase IF these assumptions play out.

Many observers will see the department’s view on a rebound in the years ahead as overly optimistic.

In the past they have been guilty, along with others, of making bullish forecasts that turned out to be far from the mark.

Just take a look at the chart below showing the expected pathway for the iron ore price. After a four-year, 70% bear market in the spot price for benchmark 62% grade ore, suddenly the price is going to begin to rally based on assumptions that may not even occur. Supply will surge, demand will lift and Chinese mines will close – that’s three pretty big “ifs”.

It all looks a little too linear – and a shift from the perfect storm that’s engulfed Australia’s smaller miners over the past year, to a perfect calm from 2017.

While no-one in the Australian market wants to see them proven wrong, because it would be a great result for the nation if prices do pick up alongside the expected lift in export volumes, with global steel production contracting, mountains of supply coming online and global growth expected to remain sluggish for many years yet, the odds remain stacked against the department’s forecasts .

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