upbeat report on iron ore

BMO says tight supplies forge a bright future for iron ore
Strong demand and the erosion of iron ore grade has driven iron ore prices to record territory, BMO Global Market asserts.

Author: Dorothy Kosich
Posted: Tuesday , 07 Oct 2008

RENO, NV -


BMO Capital Markets Monday forecast that tight supply/demand conditions and transportation constraints will support strong iron ore prices through 2011.

However, in the very short term, the global financial crisis-drive economic slowdown, combined with dropping freight rates, are forcing spot iron ore prices to decline.

In an iron ore review and outlook analysis published Monday, BMO Global Commodity Analyst Bart Melek forecast that iron ore demand will grow 8% this year and 6.3% in 2009 to 2,318 Mt, compared to an average of 15.55% for the past two years. "BMO global demand estimates have moderated over the last several months as the housing and credit crisis saves U.S. consumer confidence, reducing the outlook for global growth," he said.

While BRIC nations and the Middle East have been the main drivers of steel and iron ore consumption, nevertheless, Melek asserts that "once again, it's all about China." China is the world's largest producer and iron ore consumer, representing 54% of global demand and 35% of global supply. The country has relied on iron ore imports to meet ~40% of its gross overall needs. However, declining Chinese iron ore grades "are liable to put pressure on seaborne trade if new production does not materialize," he said.

"BMO analysis reveals that China, India, Brazil and Russia are likely to drive long-term iron ore demand growth," Melek noted. "Again infrastructure spending and internal consumption amid strong per capita income gains in these regions are on track to keep demand growing strongly."

Melek forecasts that supply constraints and still strong Chinese demand will keep iron ore airborne from 2008 to 2011. He projected that long-term global demand is expected to grow 5.3% annually to more than 2.7 billion tonnes by 2012. "It would be a considerable challenge to grow supply at this rate. By way of comparison, seaborne traded iron ore demand is expected to jump about 7.4% annually over the same period to 1.2 billion tonnes by 2013," he said.

BMO estimates that the total mine supply of iron ore will match demand growth. BMO forecast that iron over project will increase by "a very strong 36%" to just over 2.7 billion tonnes by 2013. Nevertheless, Melek noted that "supply growth looks set to follow a slightly lower trajectory, owing to more modest prospects for demand over the next few years."

Following years of underinvestment and fragmentation among producers, iron ore production has been in the rise in recent years. Annual capex has risen from US$3 billion in 2002 to US$34 billion in 2006. "New capacity spending will likely surge further into 2009, current economic downturn notwithstanding," Melek advised.

"Based on company reports tabled earlier this year, more than 600 Mt of capacity should come on stream by 2010, with a further 380 Mt following thereafter," he said. "However, given a shortage of skilled labour, equipment and capital (credit crisis), a general malaise in the financial markets and slumping demand, it looks increasingly unlikely that producers will reach their production targets."

In his analysis, Melek suggested that long-term iron ore price supply will depend on a combination of the reliance on low-grade Chinese iron, high capex costs, tight supply/demand, energy and the dollar. "Rising capital and operating costs are getting embedded into iron ore prices as they make their way through deal-making as well," Melek noted. Meanwhile, "the last few years have seen several examples of projects changing hands for dramatically high prices."

BMO forecasts that long-term prices will "trend down to a very high US-cent 105/dmtu ($65.10/t) by 2012, which BMO calculates is the long-term marginal cost of production as much of Chinese high-cost ore is displaced by seaborne supply."