Wood Mackenzie has forecast that lower Chinese demand will be the driving factor that causes iron ore prices to decrease by more than 10 per cent in the coming months.
According to Wood Mackenzie head of iron ore research Rohan Kendall, the change in Chinese demand will potentially be combined with an increase in Brazilian supply during the second half of the year.
However, the risk is expected to come from demand over performance and supply under-performance.
Kendall said China is a key factor in determining how iron ore will respond to changes in the market.
“On the demand side, Chinese construction and manufacturing hold the key,” he said.
“Tighter credit availability should take some of the heat out of the property market, but manufacturing activity remains red hot as recent demand-led power shortages in Guangdong and Yunnan provinces demonstrate.”
Brazil’s weaker iron ore production has allowed Australia to position itself as the world’s top producer.
Kendall said it is still all about Brazil on the supply side, as the country’s iron ore industry strives to regain its position in key markets after two dreadful years (in volume not value terms).
“Progress is slow going for Vale on its ‘pathway to 400 million tonnes per year’ with supply of high-grade (Carajas) fines and pellets still running well below target,” Kendall said.
WoodMac’s price forecast for the third quarter of 2021 is $US185 ($248) per tonne. Its estimated price for the second quarter was $US200 per tonne.
“We still think Q2 (second quarter) was the high point for Fe grade premiums (and discounts), and we expect both to contract slightly in Q3 (third quarter) – smaller premiums and smaller discounts – as mills adjust to much lower margins than were achieved in Q2,” Kendall said.
According to UBS, China steel mill restrictions may result in demand falling by around 75 million tonnes in the second half of 2021.
“Press reports suggest China is imposing more restrictive measures on steel production in 2H21 (second half of 2021) to ensure output is lower y/y (year over year) and to meet carbon emissions goal,” UBS stated.
“MySteel reports Baowu is drafting its own plan to cut volumes while Rizhao Steel and two other producers in Fujian Province have received orders from the local government to cut output.
“The extent of the policy is not yet clear as six other producers indicate they have not received the order to cut production; we note this policy would also be at odds with the government’s aim to deflate steel prices (albeit it could result in lower iron ore prices).”
UBS stated that Vale would be lifting its production by 11 per cent and is on track to reach its 315-million-tonne-to-335-million-tonne-per-annum guidance.
The global firm also expects that Rio Tinto shipments for the second quarter of 2020 will be around 76 million tonnes, 12 per cent less than the corresponding period last year, while BHP’s quarterly production will be 1 per cent less than last year at 76 million tonnes.
UBS stated Fortescue Metals Group’s quarterly production is on track to be 3 per cent higher than the previous corresponding period at 49 million tonnes.