The Australian government's commodity forecaster has cut its forecasts for 2014 iron ore spot prices to an average of $105/t fob against a previous forecast of $110/t fob made in March.
Spot prices are forecast to fall further next year to an average of $97/t, the Bureau of Resource and Energy Economics (Bree) said in its latest quarterly outlook. The 2015 forecast is down from the previous 2015 estimate of $103/t.
Iron ore spot prices started the year at $122/t and have fallen to around $82/t by mid-June, Bree said. The price fall has occurred as steel production in China remains historically high. But high iron ore port stocks and low steel prices have combined with a surge in the availability of supplies coming from Australia to push iron ore prices down, it said.
Spot prices in the five years since the market moved to spot pricing have been highly volatile and cyclical, Bree said. "While the iron ore price is expected to rebound later in 2014 as port stock levels in China ease and steel demand picks up again, the abundance of supply that has come on line will limit the prospects of iron ore prices rebounding to the high levels of 2013."
Bree forecasts Australian iron ore exports to reach 680mn t in 2014 from 579mn t in 2013 and rise to 764mn t in 2015. This reflects a downwards revision from the March forecasts for 2014 and an upwards revision for 2015 export volumes when it forecast exports to reach 687mn t in 2014 and 749mn t in 2015.
Global iron ore trade for 2014 has followed a similar pattern with the latest forecast tweaked to 1.31bn t in 2014 from 1.23bn t in 2013 and rising to 1.39bn t in 2015. Bree in March forecast global iron ore trade to average 1.32bn t in 2014 and 1.38bn t in 2015.
Bree has also lowered its forecasts for Chinese iron ore imports in 2014 to 869mn t from 872mn t previously and increased its 2015 forecast to 927mn t from 916mn t.
Iron ore producers in China have reduced their operating costs, but at current prices a large proportion of China's domestic production is still assessed as loss making, Bree said "If the same economic reforms in China that have pushed unprofitable steel mills to close are also applied to China's iron ore miners, it is likely that a number will close before the end of 2014."
This loss in Chinese iron ore supplies is unlikely to fully offset the substantial increase in supplies from Australia in 2014, but should provide some price support later in the year, Bree said.
Lower iron ore prices are unlikely to affect the production rates of most iron ore mines in the Pilbara, the iron ore producing region in Western Australia, which have some of the lowest production costs in the world, Bree said.
The potential tug boat workers strike at Port Hedland is a risk to Australia's exports in 2014. While the loss of one or two days of shipments can be made up through the year, the prospect of continuing industrial action may prove more disruptive. Given the high levels of existing iron ore port stocks in China and abundance of other supplies, this is unlikely to provide significant support to iron ore prices in 2014, Bree said.
World steel production in 2014 is forecast to increase by 2pc against 2013 to 1.63bn t, a slight downwards revision from Bree's previous forecast of 1.64bn t. Chinese steel production is forecast to increase by 2.7pc to 795mn t, which is down from its March forecast of 802mn t.
World steel production is forecast to grow by a further 2.1pc in 2015 to 1.67bn t, which is unchanged from the previous estimate. China will again be the main driver of growth in world steel production and is forecast to expand their production by 2.4pc to 814mn t, lower than the March forecast of 819mn t.
China's steel production growth is forecast to slow in 2014 because of lower demand in key growth areas like housing construction, tightening credit requirements in the sector, high stock levels and a government commitment to reducing pollution, Bree said. Despite the push for closures in older and less efficient steel mills, China still has significant spare production capacity that can support higher output that was borne out by the 4.9pc increase in steel production in the year to May, it said.
km/rjd
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