The long term iron ore supply balance

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Morgan Stanley has a useful note out today on the projected price of iron ore:

The spot iron ore price likely peaked last month at US$159/t (62% Fe CFR) and, in our view, will trend lower over the remainder of the year. We are clearly not alone in this view – consensus forecasts for this quarter and the calendar year averages are US$127/t and US$121/t, respectively. However, we think the CY consensus forecast is overly negative as it implies prices will need to average US$114/t over the remainder of the year. Our forecast for CY13 is US$133/t, implying a CY average of US$129/t over the remainder of the year.

MS says the market is overly bearish. At $145 and with unprecedented spreads to steel, I would not describe the market in such a way. That does not mean the whole thing is about to reverse. As MS says, port stocks are still low. On the other hand as I’ve argued, that may be a permanent feature of the new market as hoarders are scattered by oversupply fears. 

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Still, I don’t expect a whole lot more downside pressure until deeper into the second half, either, so won’t complain too much.

MS also supplies a fascinating long term chart of the supply demand balance. The years run from 2005 to 2018:

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Note 2013 is the first year in surplus then the gap blows out, and out, and OUT! At a $300 million tonnes surplus in 2018, iron should be trading at about $25. And that’s assuming quite aggressive demand growth.

Eighteen months ago, this same MS chart read as a nearly endless supply deficit. I’d be prepared to bet that in another eighteen months it’ll change again, with both demand and supply projections radically reduced, but a large surplus will remain. I expect a price equilibrium around $80.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.