China Syndrome

Ord Minnett’s commodities team has raised its iron ore price forecasts for 2017 and 2018, underpinned by a continuing run of positive Chinese economic data, subdued production from the major miners in the March quarter and an expected fall in the global iron ore surplus.

 

Our forecast for 2017 rises to US$82 a tonne from US$73, while our estimate for 2018 and 2019 is $65 a tonne, up from US$57 and US$58, respectively.

 

The majority of China data across the key property, infrastructure, and machinery sectors remains positive, with the strong start to the year making us more constructive on steel consumption and leading to an upgrade in forecast 2017 demand growth to 2.2% year-on-year.

 

Meanwhile, supply from the major producers is likely to have remained subdued in the March quarter, with combined Port Hedland and Brazil export data showing a 12% month-on-month decrease in February due to weather interruptions.

 

Additional supply from the major miners is likely to be around 70 million tonnes in 2017, but the key risk is that Chinese domestic output and non-traditional supply increase in response to higher prices.

 

Incorporating this additional tonnage and raising our demand estimates produces an expected global iron ore surplus in 2017 of just 15 million tonnes – circa 0.7% of total supply – which is essentially a balanced market.

 

Despite recent price volatility, we remain confident that the June quarter will be the strongest period from a fundamental supply-demand perspective. It is typically China’s strongest steel production period, while at the same time the majors are still recovering from March-quarter wet seasons.

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