S&P warns on iron ore outlook

Via S&P:

Our price assumptions for iron ore are unchanged. In our view, favorable steel producer margins and supply side reform in China should underpin steady demand for iron ore this year. This demand, together with disciplined new iron ore supply from major players, should support a relatively stable iron ore price for the rest of 2018. However, we expect the iron ore market to be modestly oversupplied over the next two-to-three years, and result in lower prices over this period. The gradual decline in iron ore price assumptions in 2019 and 2020 is driven mainly by China’s focus on making its economy less investment-dependent, and by continued supply growth from the seaborne market. We expect Chinese steel production growth to be flat in 2018 and decline by about 2% in 2019. In the longer term, we believe a rise in steel scrap use for steel production in electric arc furnaces (versus integrated mills) could also reduce iron ore demand from China. We expect that the penalty for low-grade ore (that is, for ores with less than 62% iron content) and impurities (silica, alumina) could stay elevated for some time. We believe China remains focused on combating pollution and will favor the use of higher-grade ore and a reduction in intake of impurities.

Budget iron ore assumptions remain at $55FOB but that actually nets out at more like $67CFR with discounts and shipping included so the S&P outlook is materially below that of the Budget making any sovereign upgrade very unlikely.