In the short term, the increase in low-cost production in Australia and Brazil will continue to put pressure on the price of iron ore as it outstrips the increase in demand. As a consequence, higher cost producers are likely to shut down operations but this will likely not cause significant reduction in the supply of iron ore. Medium and long term, the expectation is that low-cost supply will continue higher than demand as low cost iron ore expansion projects, principally in Australia and Brazil, are finalized and production ramped up. Although there should be less volatility in iron ore prices, there is no real expectation of a significant price increase.
Iron ore prices1 for 62 percent fines Fe (CFR Tianjin port) witnessed a 23 percent decline over Q1 2015–Q1 2016. The decline during Q1 2016 was a consequence of oversupply primarily from Australia and Brazil and decline in steel production in China, which is responsible for about two-thirds of the overall seaborne demand.
Increasing global supply from the development of new low-cost capacities, particularly in Australia and Brazil, coupled with lower demand from China’s steel sector, is forecast to result in prices of about US$45 per tons in 2016.
At the current iron ore prices, several high cost producers are making large losses on each ton of iron ore produced. The sustained period of lower prices is expected to result in the closure of high cost capacities, as the financial losses of these companies are beginning to accumulate. Although these closures will provide some support to prices, new low cost capacities are being developed, particularly in Australia and Brazil, which will result in only a slight increase in prices. Furthermore, China’s steel production is expected to improve and this will result in growth of export volumes over the period 2016–20.
The iron ore prices are projected to grow at a CAGR of 4.8 percent, to reach US$54/tons in 2020, owing to the improved global demand scenario.
1 "Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016
Source: IMF Primary Commodity Prices, International Monetary Fund, accessed April 2016
Source: Consensus prices from Capital IQ, accessed April 2016
*Actual numbers for 2015 is not available on the database; E refers to estimated data
2 "Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016
Source: RBC Capital Markets, Bulking Up – Iron ore prices stable while met coal prices rally, 05 April 2016, accessed April 2016
*Actual numbers for 2015 are not available in the broker reports, leveraged to build this CIB; E refers to estimated data
3 "Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016
Source: RBC Capital Markets, Bulking Up – Iron ore prices stable while met coal prices rally, 05 April 2016; accessed April 2016
Ownership changes 4
The total value of the six M&A deals announced in Q1 2016 was US$0.03 billion as compared to the 13 deals in Q4 2015, valued at US$0.4 billion.
(Please note that the total number of M&A deals include all the announced deals, even those with undisclosed value. Out of the six deals in Q1 2016, three were undisclosed)
The significant decline in iron ore prices has arrested any major M&A activity in the iron ore sector, particularly in regards to struggling smaller producers and developers.
4 MergerMarket and Thomson One; accessed April 2016
Source: MergerMarket and Thomson One; accessed April 2016