In a new report published today, BMI Research says the firm’s analysts maintain their iron ore price forecast at $70/tonne for 2017 and $50/tonne for next year.
“With the conclusion of the 19th National Party Congress and the consolidation of power around President Xi, the refocusing of Chinese economic growth away from heavy industry to services will dampen Chinese demand for iron ore. When combined with simultaneous elevated global supply, this will put a lid on prices in the coming years,” the document states.
Beijing’s war on smog has imposed production cuts to steelmakers of as much as 50 per cent. Last month, this new state of affairs prompted a plunge by 23 per cent of imports of high-quality iron ore fines and lump ore from Australia, Brazil and South Africa as factories work through inventory.
In this context, BMI predicts that iron ore prices will remain on a long-term gradual downtrend until at least 2021. “In addition, the price resilience seen in 2017 will slow consolidation among high-cost iron ore producers, namely in China, which will result in a prolonged global iron ore supply glut. Despite this, we expect consolidation to ramp up over the coming quarters as muted revenues continue to force higher-cost producers to pursue a strategy of divestment of high-cost assets and retrenchment,” the report reads.
On the bright side, however, BMI says that its experts see equities of junior and major miners such as Vale (NYSE:VALE), Rio Tinto (ASX, LON:RIO), BHP (ASX, NYSE:BHP) (LON:BLT) and Fortescue Metals Group (ASX:FMG) to outperform iron ore prices over the years due to their low cash costs and increasing efficiencies. “While falling prices will eat into their profitability levels, these miners will still remain substantially profitable until at least our iron ore price forecast period to 2021.”
The chapter on China in the report emphasizes that the Asian giant’s iron ore sector is likely to become increasingly consolidated, as low ore grades that lead to more pollution sideline high-cost domestic miners. “Around 70% of Chinese iron ore output is uneconomical at prices below $96/tonne. In particular, miners operating in provinces including Hebei, Fujian, Guangdong and Xinjiang will take the strain of lower prices in the long term, despite the temporary rally, due to their position at the highest end of the iron ore cost curve.”
Such consolidation is, actually, one of Xi’s goals. According to BMI’s document, China wants to establish a dominant iron ore production base led by state-owned Ansteel Mining, which would supply 50 per cent or more of the country’s annual consumption of the mineral by 2025, up from the current 30 per cent. “The new group will consist of six to eight mining businesses, with output at more than 200 mnt per annum.”
China consumes more than two-thirds of the seaborne iron ore market and produces as much steel as the rest of the world combined.