The long term iron ore supply balance

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. 

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:

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.

David Llewellyn-Smith
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  1. Good luck with those forecasts. Brazil, in two short months is already 25% to 35% behind that forecast. Does the MS forecast incorporate Vale’s decision to delay their Mozambique mine by anoother year?

    Woah, look at steel prices in Brazil go!

      • I’m currently going through some old presentations to see how credible these organisations are with their forecasts.

        So far I have UBS from late 2010, forecasting a 56mt oversupply in 2013. Their 2011, 2012 seaborne demand forecasts came in well short of actual.

        Their bad case scenario provided in late 2010, providing for a 1 yr delay in projects, had a 29mt oversupply in 2013.

        They got the 2011 balance wrong by 93%… 2012 error came in at a mere 104%.

        ABARE forecast (from 2000) that in 2005 Chinese damand would come in at 75mt… LMAO…

        How much credibility is their in such forecasts… absolutely ZERO… why bother?

  2. The biggest problem with forecasting IO demand is the extreme asymmetry inherent in the Australia/Brazil vs China relationship.

    In a logical, speculation free, market between equal sized partners the insane escalation in IO prices over the last 10 years would never of been possible, even attempting such an increase would have killed the market.

    Fortunately, for Australia, this is not a logical market its China and the Chinese politicians and Central bankers are well aware of the dangers of slowing their Infrastructure / RE demand too quickly.

    Like anyone in this sort of dependent relationship the Chinese politico’s hate being taken advantage of, but IO prices are such a minor problem that they will continue to build. Miners will therefore continue to profit and the relationship will continue to fester.