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Where to From Here for Iron Ore Prices?
By Sarah Belfield
28 May 2008 at 03:11 PM GMT-04:00

COLUMBUS (ResourceInvestor.com) -- As with every commodity, not just iron ore, producers risk being their own worst enemy if they respond to high received prices by collectively flooding their market with more product than buyers desire.
In a free market this product glut forces prices south, which in turn threatens the survival of the highest-cost producers. If the glut is prolonged enough and pronounced enough, here and there higher-cost producers go the way of the dodo, which takes excess product off the market and begins putting upward pressure on prices again.



For the global seaborne iron ore market, this problem is nowhere to be seen at the moment. However, a few years out from now the market landscape may change, handing back some bargaining clout to iron ore buyers.
Short-Term Tightness a Given
For the short term, it looks as though current demand-side and supply-side forces will conspire to keep the global iron ore market tight. You'd probably be hard pressed to find a market observer who disagrees with this overall analysis.
From a demand perspective, global demand for the major iron-ore end product, steel, is expected to remain high, according to the International Iron and Steel Institute's (IISI) latest short-range outlook.
IISI chairman Ku-Taek Lee said while some weakening of the United States and European Union economies is expected (which would tend to have a dampening effect on steel demand in those regions), "demand for steel will remain healthy thanks in part to the emerging markets which will maintain their own dynamism," Lee said.
IISI is projecting that those emerging markets will help expand the world's apparent steel use by 6.3% year on year to reach 1.36 billion metric tonnes in 2009. (Apparent steel use measures steel delivered from producers and importers to the marketplace. It doesn't include steel going into or out of inventories.)
The most prominent of the emerging markets are China, India, Brazil and Russia, which are nicknamed the "BRIC" countries. As a group they are expected to grow their apparent steel use by 10.3% between 2008 and 2009.
A related indicator of the likely demand picture for iron ore in the near future is the outlook for global steelmaking capacity. If sizeable capacity expansions are happening soon, then surely iron ore producers have a good excuse to be optimistic.
The OECD's Steel Committee, which met last week, is projecting this capacity will rise 18.6% between 2007 and 2010 to come in at 1.89 billion tonnes.
"China will account for around half of the global capacity addition in the 2007-10 period," committee chairman Risaburo Nezu said.
As this statistic suggests, when it comes to steel demand - and therefore iron ore demand - the word China remains the catch-cry of the day.
Australian Bureau of Agricultural and Resource Economics (ABARE) analyst Rohan Kendall said China continued to be "the most important driver of global steel consumption."
The country was responsible for around 60% of the growth in global steel consumption in 2007, and 56% of growth in 2008, he said. Over half of the nation's steel has been routed to its construction sector to build structures such as new factories and industrial buildings.
India Begins Making its Presence Felt
Increasingly, however, India has been influencing the short-term iron ore demand scene.
India's government slapped a 300-rupee-per-tonne tax on its iron ore exports early last year. This was done in a bid to ensure domestic steelmakers could source enough iron ore to work towards the government policy goal of boosting Indian steel production to 100 million tonnes by 2020.
Towards the end of 2007, India saw its monthly iron ore export figures decline from the March 2007 high of 9.8 million tonnes to roughly half of that.
ABARE expected annual exports to drop to 88 million tonnes in 2008, down 4% on the previous year. The bureau listed the export tax as one of the major factors expected to contribute to a rise in iron ore prices for 2008-09 Japanese fiscal year contracts, some of which are still being hashed out.
But iron ore buyers around the globe may have even more to worry about if the Indian government is swayed by lobbyists representing India's steelmakers. According to media reports, groups such as the Association of Indian Forging Industry and the Southern India Engineering Manufacturers Association have been calling for a complete ban on iron ore exports out of the country.
Fortescue Metals Group [ASX:FMG; OTC:FSUMF], chief executive Andrew Forrest earlier this month said he believed India was becoming "very noisy about not expanding its iron ore export industry" and was considering eliminating the exports altogether.
"If you consider that India itself only has around 7 billion tonnes of reserves and resources of hematite, then that's a very finite resource," Forrest said.
"China's shown how quickly you can run out of that ... I think India will soon be alongside China as a major iron-ore importer and that will change the balance considerably and put much more pressure on the iron ore export industry to deliver."
India's iron ore reserves contain 4.2 billion tonnes of iron, while its iron ore resource base holds 6.2 million tonnes of iron, according to the U.S. Geological Survey.
In a mid-May conference presentation, Tom Albanese, chief executive of iron ore production giant Rio Tinto [NYSE:RTP; LSE:RIO; ASX:RIO], agreed with the view that rising steel production in India will place pressure on global iron ore exports.
Albanese cited forecast figures showing Indian exports of iron ore would drop from around 80 million tonnes in 2008 to around 30 million tonnes in 2012. Alongside this was a cited forecast that India's crude steel production would go from around 50 million tonnes to around 100 million tonnes over the same period.
Rio's fellow iron ore producer Vale (CVRD) [NYSE:RIO] and steelmaker ArcelorMittal [NYSE:MT] have also commented on the iron ore market's existing tightness late last year, this time looking at supply-side problems.
In his market outlook in September, Vale's International iron ore sales director Fidel Blanco noted that expansion projects designed to bring more iron ore to the market were suffering from growing capital costs, a lack of specialized labor, equipment shortages, strengthened environmental licensing processes, and a lack of brownfields expansion opportunities. Meantime, ArcelorMittal USA's Robert DiCianni, in a presentation to the Federal Reserve Bank of Chicago, noted that cost of shipping iron ore had risen by 300% since 2003.
But perhaps it is the OECD's Nezu who has best summed up iron ore's short-term outlook. He said: "Production of principal steelmaking raw materials has increased, and numerous capacity expansion projects have been initiated, especially in Australia and Brazil. These new projects will take some time to come on stream, however, with the effect that supply of raw materials is likely to remain tight in the short term."
Further Ahead
With all the heat and noise surrounding iron ore and its high current price - not to mention the perennial drama of contract negotiations that crops up this time of year - it's easy to forget about forces acting on the market that will bear out in the medium term.
One key beneficiary of the iron ore market, the Western Australian state government, seems to be keeping the medium term in mind. As a recipient of royalties stemming from iron ore mining within its borders, the WA government has a keen interest in looking into the crystal ball to try to see where iron ore prices are headed.
The view the WA government presented earlier this month as part of its 2008-09 budget is that "the benchmark price of iron ore is currently well above its long-term average, and is likely to fall over the medium term as new projects and capacity expansions come on-stream."
Elsewhere in the budget document, the WA government described the anticipated price fall as "significant" and the anticipated increase in iron ore supply as "substantial."
In particular, it was assuming there would be a "levelling off in iron ore prices in 2009-10 and 2010-11, followed by a 25% reduction in 2011-12 as world supplies of iron ore increase to accommodate demand."
Implied average iron ore prices, expressed in 2007-08 Australian dollars, can be calculated from March 2008 quarter ABARE figures that forecast iron ore export volumes and values.
Those prices turn out to be: A$69.42 in 2007-08, A$97.26 in 2008-09, A$93.13 in 2009-10, A$75.30 in 2010-11, A$63.16 in 2011-12, and A$56.70 in 2012-13.
Rio Tinto's Albanese this month cited similar figures using an average of analysts' forecasts for iron ore fines. As at February, the average forecast showed that a peaking in price to slightly over $80 per tonne FOB (in 2007 dollars) was anticipated in around 2009, before a precipitous falling away until about 2012 to around $50 in terms of the 2007 dollar, followed by a milder price drop thereafter.