Moody’s upgrades iron ore. Sell!

Here’s a useful contrarian indicator. The ratings agencies always come in too late on bulk commodities:

» Tight iron ore supply fundamentals prompted us to revise our price-sensitivity ranges upward. Several events in Brazil and Australia have contributed to diminished supply of iron ore and we expect this situation to only slowly improve through 2019 and 2020. New price sensitivity ranges (62%Fe China) are $60/MT – $90/MT with a midpoint of $75/MT — versus the previous range of $45-$75/MT.

» Limited, incremental new capacity will be added over the next several years beyond what is ramping up currently. Some miners announced expansions to replace depleting production levels for the ore, used to make steel, while incremental tonnes will be relatively small and most are not likely to start producing in the next 2-3 years.

» Higher output from major global miners and Chinese domestic producers will see prices fall somewhat, but supply will not fully recover. We expect production levels from BHP Group Ltd. (A2 stable), Rio Tinto (A2 stable) and Fortescue Metals Group (Ba1 stable) to be higher in 2020 than 2019. However, Vale SA’s (Ba1 negative) ability to restore production following a January dam collapse at a mine in Brazil will be the main driver balancing the market.

» Some Chinese operations could resume production, but we expect environmental factors and high costs will limit this. Chinese iron ore production has been declining, reflecting environmental-policy restrictions and steel mills’ preference for higher grade ores.

» Robust steel production in China is increasing iron ore demand and contributing to the market deficit. Increased Chinese steel production levels and lower iron ore production have increased demand for iron ore from the seaborne market.

Actually that price range looks reasonable for 2020 but beyond that forget it:

  • there is no shortage or iron ore. The supply gap has been filled. The price needed to do it is much lower than today’s;
  • the current apparent shortage vis Vale is 40mt. It plans to add 30mt from S11D through 202o. Plus another 30mt of shuttered mines before year end this year;
  • Chinese iron ore imports are trending down not up as scrap rises.

We’re on the verge of a glut that will only grow as China stagnates.

Houses and Holes

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 fouding 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.

Did you know the MB International Shares Fund has returned an average of 17.1% per annum and the Tactical Growth Fund an average of 10.4%? Register below to learn more:

Latest posts by Houses and Holes (see all)

Comments are hidden for Membership Subscribers only.