10/09/14 – Macquarie slashes five-year iron ore price forecasts 5-20%



Macquarie Research analysts on Tuesday reduced their five-year iron ore price forecasts 5-20%.In a report, the analysts predicted a price of $92/mt CFR China for 2015, “based on cost curve analysis and annual averages in the $85-95/mt range through 2020.”They noted that “the iron ore market is in the midst of a transition without precedent in recent commodity history, with the long-expected displacement cycle happening both earlier and more aggressively than anticipated.”The analysts said supply growth, which strengthened amid strong operational performance, has caused “a shift down to the flatter portion of the cost curve and an accelerated survival battle commencing between Chinese domestic and high-cost seaborne ore.”

This displacement cycle is likely to continue for at least the next two years, and “rather than occasional dips below $100/mt CFR China, only occasional bounces into three figures should be expected in the coming years,” the analysts said.Macquarie analysts “still feel comfortable with the demand side of iron ore, and in our view the cost curve has proven itself once more with high-cost supply reacting in an efficient manner.”Last year, Macquarie’s projection was for seaborne iron ore demand to hit 1.8 billion mt in 2020.”From this point our forecasts have changed very little, with a modest uplift in expected Chinese pig iron production to 831 million mt in 2020 from 803 million mt in our previous forecast,” they said Tuesday.The analysts said, however, that they “heavily underestimated supply growth — this is the major delta driving our change of view.”The analysts do see some resulting winners and losers in the iron- and steelmaking chain. They noted that “the sustained fall in input cost does serve to benefit non-vertically integrated [basic oxygen furnace] steel producers, who should see a period of margin relief, while expected resilience in scrap prices makes [electric arc furnace] producers less competitive in relative terms.”

Source – Platts.com