ASX-listed iron ore mining companies are currently being lapped up by the investors with prices of ASX-listed iron ore miners going upwards amidst a price recovery in iron ore prices in China and across the international front.
The steelmaking raw material is deriving strong cushion from the inventory decline across significant Chinese ports due to the current lockdown across Australia and Brazil, presently the topmost iron ore exporters to China.
To Know More, Do Read: Iron Ore Poised for Short-term Recovery as Steel Inventory Declines in China
Australia exported $100 billion of iron ore to the global market in 2018-19, and the Department of Industry, Innovation and Science (or DIIS) accesses that the export earnings should have set a record high of $101 billion in 2019-20 due to strong iron ore market and high volumes.
However, the department anticipates that the iron ore price would cool-off in the near-term as the dark cloud of COVID-19 hovers above the demand.
Iron ore Price History and Response to Supply Disruptions
Iron ore prices have demonstrated quite volatile trajectory with price spiking in 2019 post the Brumadinho tailings dam collapse in Brazil, which brought the Brazilian iron ore giant Vale into scrutiny and led towards a suspension in its mining activities.
Later, in late 2019 the commodity retraced back on account of measures adopted by the China Iron and Steel Association to curb the price. However, in early 2020, subsequent supply disruptions, such as cyclones in the Pilbara region of Western Australia, and flooding in the south and east of Brazil, prompted prices to spike again.
China currently imports over two-thirds of global seaborne iron ore, and the demand from steel mills across China, which is currently facing some headwinds in the wake of COVID-19 outbreak, has a large implication for the iron ore market.
As per the DIIS, the iron ore market faces downward pressure in the near term over flat global steel-demand due to the recent COVID-19 outbreak. However, DIIS further anticipates the uncertainty created by COVID-19 to recede during the second half of the year 2020, while the short-term operational disruption faced by the Australian and Brazilian iron ore miners due to unfavourable weather conditions to ease in the near-term.
DIIS Price Forecast
The department estimates that the price would gradually decline over the next few years, with real prices anticipated to fall from USD 86 per tonne (seen in the March 2020 quarter) to USD 78 per tonne by the next quarter, while falling further to USD 71 a tonne by the March 2021 quarter.
The market balance is projected by the department to be more from an anticipated deficit of 20 million tonnes in 2020 to a slight surplus by 2022, as production returns to normal in Brazil and rises elsewhere, which is further estimated to keep a lid on the price with prices reaching to USD 56 a tonne by 2025.
ASX-listed Iron ore Miners and Australia Export Earnings & Volumes Projection
Australian iron ore export earnings are forecasted by the DIIS to ease back from $101 billion as the price cool-off ahead with export earnings reaching $72 billion by 2024–25; however, the volume growth is anticipated to support the earnings slightly after 2021.
The surge in export earnings in 2019 was mainly due to operational challenges faced by the iron ore mining companies across the continent due to the unfavourable weather conditions
Over the short-term, the supply from Australia is anticipated to remain in check as per many industry experts amid reduced guidance by iron ore miners such as Rio Tinto Limited (ASX:RIO). Rio Tinto revised its 2020 guidance for iron ore production down from 330-343 million tonnes to 324-333 million tonnes in February 2020, as the Tropical Cyclone Damien disrupted operations across the Pilbara region.
Rio also pointed out that road access, communications, accommodation, and electrical infrastructure took a hit, and mine sites have been flooded across the region due to 200mm of rainfall. The shipment from Port Hedland and many other concerned ports had been delayed due to the bad weather conditions across the Pilbara region and ban on shipment imposed by China during the onset of the COVID-19 outbreak.
However, BHP Limited (ASX:BHP), which also operates many operations in the Pilbara region has scaled back its production and has invested significantly in its iron ore network in recent months, which could further support operational robustness and production over time.
The DIIS projects the iron ore production across the continent to grow by 15 per cent in volume terms by 2025, reflecting new output from several significant projects in the Pilbara region of Western Australia, including BHP’s South Flank, Eliwana project of Fortescue Metals Group Limited (ASX:FMG), Brockman Mining’s Maraillana mine, which is expected to reach production by 2021, and Balmoral South project of Australasian Resources Limited, which would reach production by 2024.
How Long Would Iron Ore Sustain the Current Recovery?
Iron ore prices have shown resilience so far with the price relatively firmer against many consumption-based commodities such as copper and nickel in the event of present market crisis.
To Know More, Do Read: Iron ore Prices Beating Market Headwinds as Supply Chain Gets Derailed Thanks to Virus
However, in the status quo, the supply chain is showing some sign of recovery across China, which coupled with strong steel inventory across social warehouses and steel mills in China, and muted global demand could be a red flag to the current upsurge and should be monitored closely.
As per the latest inventory data compiled by the independent research house in China-SMM, the iron ore port stocks across the 35 significant ports rose by 1.47 per cent or 1.57 million tonnes (as on 10 April 2020) against the previous week to stand at 108.73 million metric tonnes.
While the inventory rose slightly, the average deliveries from the port declined by 9,000 metric tonnes to stand at 2.73 million metric tonnes, reflecting a decrease in demand from steel mills across China. Also, arrivals of iron ore stocks across Chinese ports have been increasing since the end of March, while deliveries from ports have changed just slightly.
The supply chain is also anticipated by many industry experts to improve in the short term. Thus, the impact of the supply shortage could diminish over time and intake from steel mills across China would determine the fate of the commodity ahead; however, many mills are anticipated to go on maintenance in the short term, which should be watched closely to fathom the price direction of iron ore and ASX-listed iron ore mining stocks.
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