The Australian Government’s commodity forecasting group has again forecast that iron ore prices are expected to fall by more than 20% over the next two years as demand from China’s steel mills eases, while domestic and Brazilian output climbs.
It is yet another forecast from the Department of Industry in its quarterly Resources and Energy report. A similar forecast in January (there are four a year) predicted a 20% fall this year – so far it hasn’t.
The report said iron ore prices on a free-on-board (FOB) Australia basis are expected to slip to an average of $US51 a tonne in 2020, a drop of more than 21% from current levels just under $US65 a tonne, according to the Metal Bulletin iron ore index prices.
But in its January forecast, the Department said it expects iron ore prices to average $51.50 a tonne this year, down 20% from 2017, because of rising global supply and moderating demand from top importer China as its steel sector shrinks.
If that forecast is to be met, then prices will have to halve from current levels for much of the next six months.
Clearly the Department doesn’t see that happening because it now sees iron ore prices averaging $US59 a tonne for 2018, or more than 15% up on the January forecast. That still means the Department is looking at a small fall in the average price over the rest of this year.
It says that will result from a positive outlook for industrial production and a seasonal rebound in construction activity in China’s spring will shore up prices.
The latest report, which covers a range of resources, said quarterly prices will fall as China’s overall iron ore imports slow 0.6% a year to 1.07 billion tonnes in 2020, with steel production easing.
"Thermal and metallurgical coal will also make major contributions to growth in export earnings,” the report said.
Coal prices have rallied over the past few quarters (reaching six year highs for thermal coal from Newcastle, with Chinese output and capacity cuts and weather events in Australia and the US restricting metallurgical coal production, and thermal coal prices kept high by strong demand and Chinese production cutbacks.
"Also propelling the value of Australia’s resources and energy exports higher in 2017–18 will be iron ore’s continued price strength (coupled with growing export volumes).
"The recovery in oil prices, the ramp up in condensate exports from new LNG projects, as well as a mini-rally in base metals prices will also increase export values,” The report said..
On the demand side, growth in global industrial production and manufacturing appears to have peaked in the first half of this year, the report said, suggesting resources prices may generally have set their highs for the cycle.
However, prices across the sector are likely to follow their own fundamentals, with supply-constrained copper prices still likely to advance. Australia is the world’s third-largest exporter of copper ores and concentrates.
Global copper prices are expected to climb to an average of $US7,910 a tonne by 2020, up 22% from an average of $US6462 this year, as slower growth in mine supply falls short of rising demand from energy infrastructure. The topped $US7,300 a tonne last month, a four years and more high
New zinc mines are expected to squeeze prices to around $US2,625 average by 2020, down from $US3,155 this year.
The departments said "the picture varies at the commodity level. Thermal coal prices are expected to reverse some of their recent gains, as growing supply from Australia and Russia offset the development of new coal-fired power plants across South Asia. Oil prices are also expected to flatten out, constrained by growing shale oil output and rising OPEC production.
"There is a significant diversity of outlooks among the metals. Iron ore prices are projected to ease in the short term, as China reduces steel output. However, prices for other metals including copper, zinc and nickel will face upward pressure over the outlook period as global industrial production continues to rise. Aluminium is expected to see strong price over the next five years, though this is largely driven by lower output from China, which is responding to pollution concerns,” the report says.