Iron Ore Prices Poised to Weather the Supply Normalcy Storm?

  • Aug 03, 2020 AEST
  • Team Kalkine
Iron Ore Prices Poised to Weather the Supply Normalcy Storm?

Summary

  • So far, ASX-listed iron ore stocks have been led by a strong rally in iron ore prices across the global front.
  • Iron ore prices have been taking cues from the supply chain disruption and robust demand from China.
  • The surge in iron ore demand along with sky high prices has prompted many ASX-listed iron ore miners such as Fortescue Metals to exceed the shipment guidance, leading to a surge in export volume and value.
  • Iron ore prices likely to stand tall?

ASX-listed iron ore stocks such as Fortescue Metals Group Limited (ASX:FMG), BHP Group (ASX:BHP), Rio Tinto Limited (ASX:RIO) have been gung-ho on back of a strong rally in iron ore prices across the global front, primarily due to high demand from the Chinese steel industry, prompting some of them to reach record highs while fanning some to contour multi-period highs.

Thanks to China’s stance to capture a large tranche of the global steel industry, the iron ore industry on the domestic counter has been upbeat. The iron ore prices have recovered the losses of the first four months of 2020 in the second quarter of the year 2020.

To Know More, Do Read: China Poised to Grab the Global Steel Trade as Economies Open up for Trade

  • The surge in iron ore demand along with sky high prices has prompted many ASX-listed iron ore miners such as Fortescue Metals to exceed the shipment guidance, and a surge in export volume and value.
  • Moreover, the Department of Industry, Innovation and Science (or DIIS) anticipates that the export volume would grow to 915 million tonnes in 2021-2022 from 852 million tonnes, seen in 2019-20, reflecting the commencement of several new mines in Western Australia.
  • Likewise, the iron ore export value is estimated to have reached $103 billion in 2019-2020 from $78 billion in 2018-2019, on the back of growing volumes and strong prices.

Supply Growth Across the Continent

The domestic supply chain seems to have recovered after witnessing a setback from weather and workforce challenges, especially across the Pilbara region.

The export value soared by 36 per cent in March to reach $8.9 billion, bringing output and earnings back to strong levels seen through most of the second half of 2019.

  • Furthermore, most domestic operations are performing strongly, which could be inferred from the large shipment of over 178 million tonnes by FMG, surpassing the upper range of the FY2020 guidance of 175 to 177 million tonnes.

To Know More, Do Read: Fortescue Metals Surpasses All Expectations, Stock Hits Another Record High

  • Additionally, FMG also suggested that there would be no change or deferment in the planned investment, and the Company previously announced plans concerning the expansion of its Port Hedland capacity to 210 million tonnes a year from 190 million, which remain on track.

In April 2020, BHP also announced plans related to the expansion of its export capacity at Port Hedland to 330 million tonnes a year from 290 million tonnes, reflecting a general expectation that Chinese steel production will remain robust, with a peak expected around 2025.

To Know More, Do Read: China- The Catalyst to Gold and Iron Ore Rally

On the domestic supply counter, the new output from major projects in the Pilbara region, including BHP’s South Flank project (commencing 2021), FMG’s Eliwana project (commencing 2021), and Brockman’s Maraillana mine (commencing 2021), would expand and offset falling output elsewhere across the continent.

The DIIS anticipates that export volumes would follow the trajectory of production and would surge to 912 million tonnes by 2021-2022 from 852 million tonnes (2019-2020), reducing the impact of price drops, leading to still relatively strong export earnings over the next few years.

  • However, there is one particular risk factor looming with the estimation of strong export earnings. While the majority of export earnings expectation took into account a weak domestic currency; the Australian dollar has recouped all the loses and appreciated ~ 29.81 per cent during the June 2020 quarter.

To Know More, Do Read:  Aussie Dollar Under Bull Run- What Are Chartists Looking At?

Iron Ore Prices Likely to Stand Tall

China, which imports currently over two-thirds of global seaborne iron ore, has witnessed a robust demand for iron ore amidst a revival of its steel industry to gear-up to the post-COVID 19 economy.

  • Furthermore, many industry experts are anticipating that at this stage the Chinese demand would not fall significantly; however, the ongoing decline in consumer spending across the OECD nations is expected to increase the dependence of the Chinese steel industry on domestic stimulus measures.
  • Moreover, many subject matter experts anticipate the iron ore prices to largely hover around current levels for the remainder of 2020, as the demand from China absorbs a gradual pickup in the supply chain.

Over the medium-term, DIIS projects that iron ore prices would come under downward pressure after 2020, as the supply chain gradually recovers toward nominal levels; thus, DIIS projects that export value would tumble to $81 billion by 2021-2022 in the wake of a decline in iron ore prices.

However, as a global economic recovery is also estimated by industry experts to take place after 2021, the steel demand could witness a surge, providing a floor to iron ore prices.

 


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