Daily iron ore price update ($60 here we come)

The ferrous complex remained under intense pressure on September 17, 2021 with both spot and paper getting flogged again:

There was no movement in Dalain overnight because it is closed for holidays until Wednesday. A circuit breaker if ever there was one needed.

My $100 target reached! Where to next? UBS has more:

Iron ore to fall below $100/t by year end

Iron ore and met-coal prices have been volatile over the last 3 months; weaker steel production in China has driven a sharp fall in iron ore prices (-45% since end-June) while supply disruption and the continued embargo of Australian coal into China has driven a sharp increase in met-coal prices (+150% since mid-May). We cut our iron ore price forecasts for 2021-23 by ~10% as we now expect the market to be in surplus from 2H21; we expect the price to fall below $100/t by the end of 2021 and average $89/t in 2022 (vs consensus of ~$132/t). We lift our met-coal price forecasts by >30% in 2021/22 to $190/t following the sharp lift in spot; we still expect prices to normalise back to ~$150/t by 2023 as steel demand slows and supply adjusts.

Iron ore: material cut to China steel production driven by weak property market

Our China property team recently downgraded starts to -9% in 2021 and -7% in 2022 with the market slowing sharply from July when tightening measures started to impact sales (note). As a result, our China Materials team has cut China steel demand & production by ~5% in 2021-23, expecting a material slowdown in 2H; we expect China steel production to plateau in 2022/23 at ~1.07Bt. We update our iron ore model for the new pig iron ore production and iron ore supply forecasts; we now expect the seaborne market to be in surplus from 2H21 (previously a small deficit in 2021); we expect this to result in a build in inventories and a faster normalisation in prices back to the 90th percentile on the cost curve (currently ~US$65/t).

Where do iron ore prices end up?

As illustrated below, iron ore prices tracked the 90th percentile of the value-in-use (VIU) curve in 2016-2018 when the market was in surplus (before the Brumadinho tragedy in Jan-19). Before this (in 2014-2015), when the market was concerned about China credit & a potential hard-landing, the iron ore price tracked the 75th percentile on the VIU curve. WoodMac’s 2Q21 iron ore value-in-use curve shows the 90th percentile is broadly flat q/q at $63/t; it is however still materially lower than the 2014 average of $107/t (note).

Yep. The only point to add is that as the price falls, so will the average breakeven cost, so we may have to go even lower in the short term.

Houses and Holes

Comments

  1. Camden HavenMEMBER

    Love to read some projection analysis and opinions as the what this means for the lived experience of average Australia and the reasons behind the logic.

    The way I am viewing it is my hypothesis that there’s a relationship between ToT , surpluses and the AUD. My next step is that the number of service industry jobs is a derivative of the above economic realities.

    • Don’t forget the role of credit. It can paper over all sorts of stuff in the short- to medium-term.

  2. Failed Baby BoomerMEMBER

    Camden,
    Yup it is all very well knowing the global shock is nearly on us, but exactly what will it mean to the average aussie???

    • Dunno about the avg aussie, but WA miners and their Perth house prices must be starting to quiver a little. Its 2013 – 2019 all over again. No wonder corelogic is still missing the Perth price movements, as directed by the RBA. Thou shalt not show price drops !!

      As DLS says, the big guns will keep pumping it out, a few smaller ops will start to fold up again. Theres quite a few little sh!t shows in WA and NT pushing anywhere from a million to 3 mil tonnes while things are hot. They are all contract mining, minimal plant, easy to turn off & shut the gate.

      For the avg aussie, will take a while to shake out. Debt & deficit is now wholly accepted as a requirement to live. Markets dont exists so its on to the next experiment, and will be fully embraced if it means something for nothing. We are moving well out of the generation that existed financially though the 70/80’s. They know no other way now.

  3. ‘we expect the price to fall below $100/t by the end of 2021′ ………… how ’bout by the end of the week ! dufus !

  4. I wonder if those cash costs include shipping costs? Recent costs from Brazil have doubled and then there are royalty costs on top of cash costs FOB. The smaller producers will struggle with Venture Minerals already shutting down its Tasmanian operation after just one shipment!

      • Yes, IO at A$300 per tonne will do that.
        Shipping small cargoes from Chile can cost $65 per tonne. Cargoes from Geraldton in June Q 21 were US$30.40 per tonne and likely more now, while Capesize from the Pilbara to “Asia” is around US$14.15 per tonne.

  5. MGX looking like a good way to play it for any stabilisation in price. Nearly 30 cents per share in cash.
    $66 odd cost per tonne.