Search on
News Title
News Details
Reports/Directory
Glossary
Title_head
KPMG take on iron ore prospects
1538 times viewed.
Monday, 15 Apr 2013
EmailButton
Pdf_button

With an almost doubling experienced in the quarter, accurate short term prediction of iron ore pricing is more art than science. Yet many financial institutions and mining companies are making decisions on projects with 10 year development time and 30 year life with this price volatility front of mind.

The continuing urbanization of the world’s population is driving the consumption of steel, with demand expected to double by 2050. Changes in technology, impact of carbon pricing and increased generation of scrap steel will moderate the proportional demand for iron ore, but most analysts agree it will be above current levels. At this level of demand without new projects both the Australia’s Pilbara and Brazil’s Minas Gerias current known reserves will be exhausted by 2050.

As low cost hematite deposits run out, sources of iron requiring greater capital investment and operating costs for infrastructure and processing will be needed and change the price point. Just as Chinese steel mills destocking gives insight into the effects on short term price of changes in demand, the continued crackdown on illegal mining in India has given the industry an insight into the dynamics when a substantial proportion of the global trade of iron ore is removed.

Seasonal effects, short term mismatch between supply and demand, commercial decisions all influence spot price, we must have faith that the urbanization trend will continue to drive demand, and profitable long term growth.

Spot iron ore prices (62% Fe content), which were on a downward path since 4Q11, saw an increase during 4Q12. In the previous year, the prices started to first fall in Q4 2011 when the industry witnessed a 20 percent drop from a peak of USD 175 per tonne to USD 180 per tonne which it had achieved during the first nine months of 2011. In Q4 2012 the prices increased to an average of USD 121 per tonne marking an 8 percent increase on QoQ basis although 14% lower on YoY basis.

China, the largest steel producer in the world, is expected to continue as the most important factor guiding the global iron ore market prices. Sluggish steel production in Chinese steel mills; re routing of iron ore exports to China that were originally destined for Europe, Japan and Korea; continued destocking by Chinese steel mills and overall weak macroeconomic fundamentals led to a decline in iron ore prices during the first three quarters of 2012.

However, prices rose in 4Q12 driven by increased iron ore demand from Chinese steel mills. China’s steel production rose in 2012 driven by the construction of railways, roads and bridges. Further, with China ending its steel destocking cycle in Q1 2013 and moving toward anticipated higher imports, the iron ore prices could rise from December 2012 through March 2013.

Iron ore prices are likely to remain on the downward path for the coming years after increasing during 1Q13. Downward pressure on the iron ore price is expected in 2H13 due to a combination of anticipated lower steel output and continuous supply growth from the major iron ore miners. The global seaborne export volumes are expected to reach a very high level, which is expected to pull down the prices of iron ore.

Consequently, the average consensus prices are expected to moderate, with price expected to be USD 124 per tonne in 2013, USD 115 per tonne in 2014 and USD 105 per tonne in 2016. In the longer term, the same themes still exist in the iron ore market with execution on supply projects continuing to disappoint and increased expectation from Chinese iron ore imports required to balance the global sea borne markets.

On the supply side, production from two of the major iron ore producing regions in the world is expected to decline in 2013 due to regulatory and political uncertainty in those regions.

1. Production and exports of iron ore from India are expected to decline in 2013 due to continued restriction on illegal mining. With the MB Shah commission expected to release its report on Odisha in early 2013, the exports from the country are expected to be further affected.

2. The West African region, which was being dubbed as the new Pilbara’ and was being considered as one of the most important regions for iron ore production in the world, saw Vale’s Simandou project being put on hold and Rio’s Simondou project slowing amid existing political uncertainty in the region.

In the medium term, the growth in supply is expected to outpace that in demand, due to mine expansions and increased production capacity in Australia, Brazil and West Africa.

1. Australian iron ore exports are expected to have increased 10 percent YoY to 481 MT in 2012, supported by capacity expansions at a number of major projects owned by key iron ore producers, such as Rio Tinto and BHP Billiton. During 2013, Australia’s iron ore exports are forecasted to increase 13% to 543 MT due to reaffirmed commitments to expansion of projects that appeared much less certain during 3Q12. Some of the projects that are expected to support growth in Australia’s production and exports in 2013 include: Fortescue Metal Group’s Chichester Hub (annual capacity of 40Mt) and Firetail deposit at Solomon Hub, CITIC Pacific Mining’s Sino Iron Project and Rio Tinto’s Hope Downs 4.

2. Brazilian iron ore exports are expected to have increased 1% YoY to 327MT in 2012. The aggregate exports from Brazil are expected to remain constant at 327 MT in 2013. This is primarily due to anticipated lower exports from the country’s largest supplier, Vale, to Europe. The company expects that the balance supply from Europe could be diverted to emerging nations and specifically to China which is expected to be the company’s major demand driver during 2013. It expects industrial production to grow by about 7 percent in emerging markets in 2013.

3. Indian iron ore exports, which remained stable at 2011 export levels in 2012, are expected to decline by about 26% in 2013. This is expected in response to continued government measures against illegal mining. Production from the state of Goa was stopped in 2012 based on the recommendations from the MB Shah Commission. The Commission will now release its report on illegal mining in the state of Odisha in early 2013 which is expected to lead to decline in production from the state. This anticipated decrease in iron ore production could provide an opportunity to other major iron ore exporting economies who could export to Indian steel mills located on the coastal regions at competitive rates.

4. South Africa recently overtook India as the third largest exporter of Iron ore to China, after Australia and Brazil. The iron ore exports from the country are expected to have increased 12% YoY to 48 MT in 2012 despite violent labor unrest which led to numerous deaths as well as severe losses for mining companies during the year. The Anglo American subsidiary Kumba lost 2.2MT of finished iron ore as a result of a strike by 300 workers demanding increased wages. The country’s iron ore exports are forecasted to further increase by 4% YoY to 50 MT in 2013.

5. Iron ore exports from West Africa, which was being considered as one of the most important growth regions in the world, are expected to have increased 9% YoY to 12 MT in 2012. However, given the current risks and political uncertainty surrounding the development of iron ore mining activities, the region’s iron ore exports are expected to remain constant at 12 MT in 2013. Also, Vale recently put on hold its plans for its USD 5 billion Simandou project in Guinea.

Source - KPMG.com

(www.steelguru.com)

This is alternative content.

/
Arcelor
More Raw Material News