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Iron ore industry likely turbulent through 2020

With the disruption of supplies from India, concerns over slowing economic growth in China, and the effects of large stockpiles forcing the price of iron ore through a series of supposed “price floors,” the iron ore industry has faced a turbulent time during 2011 and 2012. While the price of iron ore appears set to make a partial recovery, a new report from Roskill’s offers a market outlook to 2020.

Increased concentration, vertical integration and foreign ownership is likely.

From 2006 to 2011, the promise of a high return on investment led to a decrease in the concentration of corporate control of seaborne trade in iron ore. During this period, the share of seaborne trade controlled by Rio Tinto, BHP Billiton and Vale (the “Big Three”) fell to 57.3 percent of the world total. This trend is expected to reverse to 2020, as the limited availability of capital will make securing project financing increasingly difficult for emerging producers. Much of the increase in capacity is expected to come from capacity expansions in Australia and Brazil and from projects backed by leading steel producers seeking to secure future supply.

New capacity will exceed growth in demand and force high-cost operations out of the market.

Downward revisions in the long-term outlook for iron ore demand and prices are likely to lead to the delay, suspension or cancellation of a large number of projects. Nonetheless, Roskill estimates that 425 metric tons per year (mtpy) of nameplate capacity will be added from the middle of 2012 to the end of 2014 and that capacity additions will continue to exceed 100 mtpy through to 2020. These additions are likely to exceed demand growth and mostly represent low to medium-cost operations. Consequently, producers at the higher end of the cost curve – particularly those in China – will gradually find themselves unable to compete in the open market.

Demand for steel is expected to grow at a slower rate.

In 2012, a destocking phase among steel producers depressed demand for iron ore and the World Steel Association expects apparent consumption of finished steel products to grow by only 2.1 percent in 2012, down from 6.2 percent in 2011. A partial recovery appears likely, as the construction sector in China and increased infrastructure spending will support growth in demand. During the period to 2020, however, rising demand from other emerging nations is unlikely to fully offset the slowing pace of growth in the intensity of steel use in China, as this country approaches a peak in per capita steel consumption.

Roskill expects growth in apparent crude steel use to average 2.9 percent per year from 2012 to 2020. Owing to the ongoing shift of steel production to countries with a higher use of iron ore per unit of steel, Roskill forecasts that demand for iron ore, at 3.1 percent per year, will marginally outpace steel demand, despite a relative increase in the use of scrap metal.

Prices are likely to remain volatile.

Uncertainty over the Eurozone affects the iron ore industry through its effect on demand, as well as on the reduced availability and higher cost of capital. Revisions of figures on Chinese growth targets and performance are likely to result in further short-term peaks and troughs, although much of the adjustment to a more realistic outlook has already taken place – albeit some rebound from excessive and unwarranted pessimism may be expected. Other risk factors include growing resource nationalism, particularly in Africa, highly unpredictable energy costs, rising labor costs and the fate of the Indian mining industry following the mining bans in Goa and Karnataka states.

Following the slump in prices from June to September 2012, Roskill expects prices to remain above $120 per ton until the end of 2014, while a restocking phase may push prices towards $135 per ton during 2013, although large fluctuations are not unlikely. As new capacity comes on-stream, the industry’s price floor will gradually drop and Roskill expects that the $100 per ton price level will be repeatedly tested and eventually broken towards 2015. In its baseline scenario, and adjusting for inflation, Roskill expects that prices may trend towards $85 to $95 per ton during 2016 to 2020.