Shipments from Australia are expected to expand to 934 MT by 2020 from 835 MT in 2016
Australia and Brazil, the world’s two largest iron-ore exporters, are expected to each add about 100 million metric tons (MT) of iron ore supply by 2020. This in turn would result in a global glut and slump in iron ore prices, forcing marginal miners to cut output, according to Citigroup Inc. and as reported by Bloomberg on September 26th, 2016. Shipments from Australia are expected to expand to 934 MT by 2020 from 835 MT in 2016, while Brazilian exports are seen to rise to 480 MT from 371 MT in 2016. The rise in shipments would increase the global surplus to 56 MT in 2018 from 20 MT in 2016. Therefore, the need of the hour is to bring about price-induced curtailments to help rebalance the global market, according to industry experts.
Iron ore is in demand for construction projects around the world. Iron ore exports totaled $71 billion in 2015; Australia accounted for 51.7% of the overall iron ore exports by value at $36.7 billion. Brazil accounted for 19.8% of the total global exports in dollar terms at $14.1 billion.
While iron ore has rallied in the beginning of 2016, investors are now refocusing on prospects of rising output from the top suppliers that could pull down global prices. Brazil’s mining giant Vale S.A. (NYSE: VALE) is set to start a four-year ramp-up of its S11D project, which will have the capacity to produce 90 MT a year. Industry watchers have predicted that the additional output will probably contribute to weaker prices. Vale’s iron ore shipments in Q3 FY16 are expected to rise by 6.8% to 313.4 MT. In Q2 FY16, Vale’s shipments are expected to total 95.6 MT, up 10% Y-o-Y.
Meanwhile, the price of landed Chinese iron ore has declined and is now in the mid $50s per ton. The acceleration of supply might have added some downward pressure on iron ore, with prices expected to remain around US$60 per ton in H2 2016 and during 2017 on sustained Chinese demand and controlled expansion plans from the majors including BHP Billiton Limited (NYSE: BHP), Rio Tinto PLC (NYSE: RIO), Vale, Anglo American PLC (OTCMKTS: NGLOY) and Antofagasta PLC (OTCMKTS: ANFGF).
Iron ore capacity expansion
The expansion of ore supply is expected to create strong headwinds for miners through 2017 and thereafter. Prices of iron ore with 62% content delivered to Qingdao was steady at $56.77 a dry ton on Monday, September 26th, 2016, according to Metal Bulletin Ltd. Prices are 3.7% lower in September 2016, and are heading for their first consecutive monthly decline since November 2015. Citigroup reiterated its outlook for ore dropping to $45 next year and $38 in 2018.
The global surplus will probably start to shrink after 2018, dropping from 56 MT to just 8 MT in 2019, according to Citigroup. It estimated price-induced curtailments would be about 150 MT in 2018 and more than twice that figure in 2020.
Global outlook for iron ore
The price of iron ore are predicted to tumble, after rebounding somewhat in early 2016, as the biggest producers are pressing ahead with expansions planned when the market was soaring. With iron ore prices dipping below $40 per metric ton at the end of 2015, only a handful of the largest producers with the lowest-cost operations are expected to survive.
In a manner similar to the one being used by the Organization of the Petroleum Exporting Countries (OPEC) to support oil prices, Andrew Forrest, the founder of Fortescue Metals, has called on iron ore mining firms to cap their shipments. However, iron ore producers and analysts say any cuts to output would likely be offset by competitors rushing to fill the gap.