ANZ lowers iron ore forecasts below $US60

"While large volumes of low-cost supply continue to be commissioned, floor price and long-term price assumptions need to be lowered."
Mark Pervan, Head of Commodity Research, ANZ

Deteriorating conditions in the iron ore market have forced ANZ to lower its forecasts on the commodity to more normalised levels of below $US60 a tonne in 2015, taking almost a quarter from its previous expectations of $US77.

The iron ore market has been hit by the perfect storm of substantial new supply in a weakened demand environment. As a result, spot iron ore prices have declined 60 per cent in the past 12 months and now sit at a near six-year low. 

It’s important to remember while the price slump has been dramatic and hard to monitor, 85 per cent of the seaborne market is still making money. This makes it difficult to conclude that it looks oversold. ANZ Research believes that while large volumes of low-cost supply continue to be commissioned and the big miners take a more realistic view on profit margins, floor price and long-term price assumptions need to be lowered. 

The upshot is ANZ Research is making substantial downgrades to its short and long-term price assumptions on Iron ore. It now expects 2015 iron ore CIF China prices to average $US58 a tonne, 24 per cent lower than previous forecasts of $US77 a tonne. 

The surplus of iron ore is expected to swell to a record 85 million tonnes and remain around that level for the next two years. ANZ’s forecasts for 2016 and 2017 have also been downgraded by 30 per cent, not tracking any higher than the existing spot price of $US63 a tonne. Prices will firm in 2018 as the surplus diminishes, but supply will remain well above historic levels for the rest of the decade. 

Super high iron ore prices in 2010 and 2011 have triggered a wave of new supply, which is struggling to be absorbed by the weakened demand environment. The biggest supply response has come from Australia, where three of the four largest iron ore producers in the world have committed over $US10 billion in expansions over a 4 to 5 year period. 

The two-year supply lag took effect in 2013, when Rio Tinto, BHP Billiton, and Fortescue Metals added 100 million tonnes to Australian iron ore exports — three times the 30 million tonnes added each year over the previous decade. 

While growth in demand in China has slowed substantially since 2011 and prices have more than halved, these large expansions have sunk the bulk of the capital expenditure, meaning the producers see little incentive in pulling back activity. 

The rub for the rest of the seaborne industry is to make-way for the expanded low operating cost output. However, with the big Australians companies maintaining a 50 per cent market share, and the other large low cost producer, Vale, unlikely to budge on supply, it’s been left to the remaining 25 per cent of the producers to rebalance the market.

Mark Pervan is ANZ’s head of commodity research