Iron ore prices expected to slip back

Iron ore will sink back to $60/ton in 2020 as a pickup in supply eases a global crunch, the world’s biggest shipper warned, while cautioning investors that the expected slump won’t be immediate.

Prices will average $63 next year as global mine output rebounds after disruptions in Brazil and Chinese steel production contracts, the Australian government said in a quarterly report. While that’s up slightly on a September forecast, it represents a 21% slump from this year’s average, it said.

Iron ore has endured a tumultuous year as supply woes in Brazil and Australia spurred a rally to more than $120 in July, before prices fell back as exports picked up, then pushed into the $90s this month.

Australia joins others in flagging that while the recent climb isn’t at risk of an imminent collapse, there is likely to be a retreat over the full course of 2020. “Bouts of restocking by Chinese steel mills have helped support the price as global supply steadily recovers,” the department of industry, innovation & science said, adding that prices aren’t likely to retreat much in the short term as the market remains tight.

Iron ore is forecast to fall over the course of 2020 as seaborne supply recovers further and Chinese steel output drops, it said. Lower prices would crimp revenue and income at the country’s top miners, including BHP, Rio Tinto and Fortescue, though their margins on producing the raw material will remain substantial.

The department predicts that prices will extend declines in 2021, averaging $60.50. Its projections refer to spot ore with 62% iron content, free-on-board Australia. Benchmark spot ore landed in China was at $92.55 on Wednesday, and on Thursday futures in Singapore were little changed at $91.59.

The view from Australia echoes recent predictions from banks. Citigroup expects iron ore to fall in 2020, though a drawdown in inventories this year and challenges of a supply recovery in Brazil mean a sudden collapse isn’t likely.

Morgan Stanley has said prices may remain elevated in early 2020 but decline through the year as tightness unwinds, with iron ore the least-favoured commodity over 12 months. Global seaborne supply is set to expand 3.6% in 2020 after shrinking this year due to Brazil’s supply problems, says the Australian report.

Exports from the South American country will surge 7.4% next year, while shipments from Australia will increase 3.7%. Chinese imports will be flat at 1.06-billion tons in 2020 and rise 5.5% in 2021, the report said. The country’s crude steel output will fall 1.2% next year as consumption drops 2.3%.

The steel industry has faced headwinds from slowing vehicle production and persistent uncertainty about the global economy, it said.

Bloomberg