Iron ore’s shaky outlook

The price of iron ore looks set to disappoint stakeholders in the upcoming months on the back of increasing global oversupply. A Citigroup forecast predicted the price of iron ore in the third quarter would be $51 per tonne, despite previously estimating it would be $64. More worryingly, the research arm of the bank also forecast that pricing of iron ore would slip to $48 per tonne in the final quarter of 2017 – a significant cut from a previous prediction of $60.

In a report dated June 19, the bank said: “Chinese blast furnace utilisation and its associated iron ore demand reached a near-term peak. We foresee more downside risks to iron ore prices and anticipate the near-term trough to occur in the fourth quarter and first quarter [of 2018].”

Another bank foresees a similarly gloomy picture for the price of iron ore: Barclays’s research estimates that the material will likely trade at around $55 per tonne over the next few months.

Falling iron ore prices have already made a dent in charter rates, with the Baltic Capesize Index dropping from 2765 in late March 2016 to 997 on July 4, 2017. The index has dropped 26% in the past month alone.

A gloomy picture

Citigroup now estimates that there will be a surplus of 118m tonnes of iron ore by end-2017 as continued expansion by large miners adds about 60m tonnes of additional supply this year. This expansion includes mining company Vale’s S11D project, also known as Serra Sul, located in Pará, Brazil. The operation is the world’s largest iron ore mining project, mining 90m tonnes a year.

Another source of iron ore surplus, according to the bank, will likely come from the Roy Hill project in the Pilbara region of Australia, which is estimated to have reserves of more than 2.4bn tonnes of iron ore. The mine is expected to have an operating life of over 20 years and it is anticipated that 55m tonnes of the raw material will be extracted each year.

This supply/demand imbalance is exacerbated by Rio Tinto’s announcement that it will invest $30.9m into a feasibility study of the Koodaideri iron ore mine, located in the same region as the Roy Hill project. Here, up to 70m tonnes per year of iron ore is anticipated from a mine with a lifespan of around 30 years.

Glimmers of hope

Falling commodity prices are pushing mining companies to put further downward pressure on capesize freight rates in a bid to maintain their profitability. However, not everyone is despairing about what might happen to iron ore. Clarksons Research points to potential upside in the form of Indian iron ore exports. In a research bulletin, the broker said that cuts to the country’s iron ore export tariffs in 2016 led to an increase in output by Indian iron ore miners of 21% that year, despite dropping global iron ore prices. And while Clarksons identifies a number of risk factors to iron ore export growth, Indian iron ore exports are predicted to nearly double to 37m tonnes this year.

There are also positive moves for iron ore shipments in South America, with Navios Maritime Holdings’ South American unit expanding its barge fleet this year in support of its belief that a recovery in iron ore shipments from the Hidrovia river system is on the cards.

China is also still in the market for seaborne iron ore with imports from January to May up 7.9% from the same period in 2016 to 444.6m tonnes, putting the country on track for an annual increase of about 65m tonnes, according to Thomson Reuters Supply Chain and Commodity Forecasts. In a further boon, the analyst notes that imports are expected to be robust in June’s final figures with recorded arrivals of at least 93m tonnes forecast.