From Mac Bank:
Meanwhile, the majors continue to increase supply. Rio Tinto’s plans to achieve a capacity of 360mtpa are well underway which should mean shipments from the company are 40mtpa higher in 2H this year than 2H14. Although Rio are contributing the most to supply additions this year, they are not alone – we estimate around 90mt of supply additions from operations at the lower end of the cost curve in 2015 and a similar number in 2016 as well. Given that demand is at a seasonal high now while supply is expected to continue to arrive in 2H and into next year, it seems inevitable that another round of displacement will occur, requiring prices to be driven
down again. The challenge for the next phase of displacement is that costs have moved down, meaning dollar denominated prices will have to work harder to drive production out and that with most of the highly response marginal supply already gone, the next phase of displacement will need to come from companies more focussed on balance sheets than short term cash margins. In order to encourage these companies to leave, prices may have to stay lower for longer.
The first chart tells you the iron ore price is not about collapse again given the scope for a little more restocking at steel mills. But the second one tells you that it most definitely will keep falling before long on increased supply. A snippet from UBS discussions with Chinese steel mills offers texture:
Iron ore prices are seen retesting 2015 lows over the coming months by some while all steel producers we spoke to are fully aware of the new supply coming to market. Though some thought low 50’s per tonne would be a floor with recognition that the iron ore producers began to make noises when the price went below US$50/dmt cfr in April this year.
My base case for the year remains price erosion into another crash in the Q3 slowdown and destock. There is no sign yet of any improvement in Chinese credit that could lift construction before then.
We ought to be back below $50 before September so I reckon we’ll give $30 a real shake then.
Just in time for John McGrath’s listing!