Coome ON VMS lets make it happen. Get this IO going. IO price good, demand good, need to rock this now. As has been said on here before at the end of the day we sell to Singapore, they sell too highest bidder.
Iron Ore – A Polarising Market- July 21, 2021 Iron Ore remains a commodity that polarises the market. While supply continues to be the main focus of the market, demand has been just as important to the strength of Iron Ore over the past 12-18 months. There have been some extreme circumstances that have got the market in the situation where Iron Ore has broken through and maintained levels above $200/t
On demand, Chinese economic activity and steel demand was impacted materially in early 2020, given the implications of COVID-19, however this recovered extremely quickly from 2Q20 and into 2H20 on the back of supportive stimulatory government policies. Similarly, the Rest of the World was significantly impacted in 2020, and while it took longer to recover, it is now accelerating in terms of steel demand as economies recover and strengthen.
On supply, issues commenced with the dam failures in Brazil (both Samarco and Brumadinho), then tightened further on the back of COVID-19 related issues (labour in particular) further impacting supply. The Pilbara has also had its issues, which shouldn’t be ignored, which from our perspective relate to the diversified majors under investing in sustaining capex through the downturn. These mixed causes have conspired with the pandemic to tighten overall supply, ultimately pushing Iron Ore prices higher..
A number of these factors, both in terms of supply and demand, will ease over coming years, so we expect Iron Ore prices to taper from current levels. While the diversified major resources companies (whose earnings are dominated by Iron Ore) may still outperform, given ongoing earnings upgrades, strength in balance sheets and free cash flow, limited M&A activity and strength in returns, we have a relative preference towards other commodities within the complex. Our preferred exposures within the Global Resources Fund remain Base Metals (Copper and Nickel), Battery Materials and Oil & Gas. The strength in Chinese steel demand growth year to date has been a continuation from the strength seen through 2H2020. China slowed quickly and aggressively in 1Q CY2020, given the implications of Covid-19, but likewise, the reopening was quick and robust, hence production rates have been high during 2H2020, and continued into 2021.
Given the market backdrop we have described, we currently forecast Iron Ore prices (62% Fines) to taper from current levels towards $170/t in 2H21, $140/t in CY22 and $110/t in CY23.
While we believe that we have been ahead of the curve in terms of our positive view on Iron Ore (in particular following numerous China, Brazil and Pilbara trips, both in person and virtually), we have certainly been surprised by the absolute level of strength in the commodity over the last 6-9 months. Our expectations for demand strength and supply weakness continue and have been exceeded during this period, with COVID only exacerbating market tightness, through Chinese construction related stimulus and COVID-related supply issues in Brazil.
For many of the reasons already discussed, we do not believe these are conservative forecasts. Instead, these forecasts reflect our estimates based on granular supply and demand analysis for the commodity. Some extreme circumstances have seen the market in Iron Ore break through and maintain levels above $200/t. As we highlight regarding the supply issues we have seen in Brazil, this supply contraction commenced with the tailings dam failures (both Samarco and Brumadinho), then tightened further on the back of COVID-19 related issues impacting supply further. The Pilbara has also had its issues, which should not be ignored, which from our perspective, simplistically relate to the diversified majors under investing in sustaining capex through the downturn.
The key question for us is how large (and how quickly) the Simandou project in Guinea will be brought online over the medium term, in order to displace this marginal domestic Chinese supply. China has set plans in motion for more independence in terms of Iron Ore, which involves the development of additional African supplies. While we expect the Simandou project to come online faster and larger than market expectations (similar to what we have seen with China’s investment in Bauxite in Guinea, and supporting China’s aim to diversify away from Australian supply), ultimately Chinese domestic iron ore supply is likely to remain the marginal tonne.
VMS Price at posting:
12.0¢ Sentiment: Buy Disclosure: Held
(20min delay)