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The iron ore market is expected to be in surplus for the next few years and possibly even the next decade. A number of factors are expected to contribute to this surplus. These include:

In addition to considering the supply and demand balance, we consider the marginal costs of production. A year ago the Chinese cost curve would have prevented the iron ore price from falling below $120/tonne. Since this time, iron ore fell to a low of $87/tonne. Even at these price levels, the volume response from China was minimal in that they did not respond by reducing their domestic production. Focusing on the reasons for this elasticity led us to the conclusions that a significant proportion of China’s costs were linked to the market prices of iron ore compared to other mining projects (Chart 2 ). Thus we have revised our cost curve (Chart 3) down to an average of $100/tonne.

cost and tonnage

cost and tonnage2

Further we need to be cognisant of the fact that one year ago prices were maintained due to one-off supply constraints from decreased exports. In particular, output losses in South Africa from strike actions at Sishen Mine (1m tonnes) and protests from Carajas Mine in Brazil (5m tpm) and export losses due to mining bans in India led to price increases in the fourth quarter of 2012 of nearly 30%.
Therefore, given the additional supply that is expected to be realised over the medium term leading to a surplus market, coupled with lower cost curve, we have revised our long term forecasts from $120/tonne to $98/tonne based on Chinese spot prices, 62% Fe, CFR.

table

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Lara Smith
Lara is the CEO and founder of Core Consultants. She has been an analyst for over thirteen years and has focused on commodity markets for just over a decade. She began her career as a buy-side analyst at Foord Asset Management in Cape Town, before taking a Head of Research role at a mining corporate finance and investment firm.
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