Iron Ore Prices To Remain Below $50/tonne

The iron ore marketing remains in oversupply. The combination of a weak steel demand, the commissioning of new low cost capacity and the reservations among high-cost producers to shut down operations continues to plague the market.

Producers did try and cut costs at the beginning for the year and attempt to destock, but unless demand begins to rise soon (unlikely) these attempts would have been fruitless.

The outlook for steel demand remains focused on China. China has committed to reducing its steel capacity, which is at the heart of the iron ore saga, but this is unlikely to occur.

The plan was for China to eliminate around 45m tonnes of crude steel capacity this year. This followed the February 2016 announcement by China’s State Council (CSC) revealing that China’s central government wanted to eliminate 100-150m tonnes of capacity by the end of 2020.

However, as a seasoned commodity analyst and having observed China for a long time, these announced targets are unlikely to occur, based not only on historic precedence, but also on the fact that new capacity additions are still being planned!

Furthermore, even if they did meet these reduction targets, China has around 400m tonnes of overcapacity and to eliminate 45m tonnes this year really doesn’t begin to touch sides!

It is important to understand that in general, overcapacity tends to drive overproduction. These two numbers are inextricably linked. The fact is that this capacity was developed and capacity additions are still ongoing, not for economic and long term market viability, but as a means of creating employment and ensuring social stability in China. This is not going to change. Elimination of significant capacity, necessarily means that jobs will need to be created elsewhere. At present there does not seem to be an alternative.

Indeed, low iron ore prices should trigger a net fall in supply- without mentioning names, one prospective South African iron ore producer in the last year has had to refinance the project with different partners three times and it is still doubtful as to whether the project will start. That being said, new production is being ramped up by iron ore majors, who are expected to keep raising output until the end of the decade. An estimated 36% of iron ore production is loss-making so there is room for further cut backs to offset the new cheaper production.

Structurally as the iron majors are intent on ramping up and China’s steel capacity isn’t going anywhere for the time being, iron prices should remain below $50 with downward bias. There may be some short rallies during restocking cycles, but even if prices go above $50 during those times, we don’t expect it will be sustainable.

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