Are iron ore prices about to fall?
Hot iron ore prices could drop in the second half of 2021 as Chinese construction demand weakens and Brazilian mining production accelerates – but that’s not a safe bet either, says Rohan Kendall, manager Wood Mackenzie Iron Ore Research.
Kendall believes the “balance of risk” is tilting towards more demand and less supply, which is good news for our iron ore miners.
“On the demand side, Chinese construction and manufacturing hold the key,” he says.
“Closer credit availability is expected to reduce some of the heat in the real estate market, but manufacturing activity remains searing, as evidenced by recent demand-side electricity shortages in Guangdong and Yunnan provinces.”
On the supply side, everything revolves around Brazil, as the country’s iron ore industry struggles to regain its position in key markets after two terrible years.
“Progress is slow for Vale on its ‘path to 400 million tonnes per year’ with a supply of high quality fines and pellets still well below target,” said Kendall.
WoodMac has raised its price guidance for the third quarter to US $ 185 / t CFR from an estimated US $ 200 / t in the second quarter.
“We still believe the second quarter was the peak of premiums (and discounts) for iron content, and we expect both to contract slightly in the third quarter – lower premiums and discounts – as the factories are adjusting to much lower margins than those achieved in the second quarter, ”Kendall said.
UBS: Is China slowing down steel production?
News reports also suggest that China is imposing more restrictive measures on steel production in the second half of the year to ensure lower production year-over-year (y / y) and to meet emissions targets by carbon, according to UBS.
“China’s crude steel production in January-May grew 13.9 percent year-on-year, from 58 million tonnes to 473 million tonnes according to official data,” UBS said.
“If the government decree is implemented, steel production in 2H21 would fall> 10% yoy (assuming June is + 5% yoy, as the CISA data at 10 suggests). days).”
But UBS believes that this policy would contradict the government’s goal of deflating steel prices.
On the demand side, Vale in Brazil is expected to increase its shipments by approximately 11% year-on-year in 2Q21, ASX: BHP and ASX: FMG are broadly stable year-on-year, while ASX: RIO is down approximately 12 %.
BHP, FMG, RIO stock price charts
In total, the majors’ iron ore shipments are expected to increase by about 65 million half-and-half tonnes in 2 hours, according to UBS.
“We are cautious about iron ore prices over the medium term as supply increases and demand is expected to slow,” UBS said.
“Spot FCF [free cash flow] remains solid (RIO, BHP, Vale, FMG 15-25% yield) and yields should be attractive in 2021.