Iron ore has advanced 28 percent this year to rebound from three straight annual declines after policymakers in China pledged to bolster growth. The world’s second-biggest economy churned out a record daily amount of steel in June as mills boosted supply to take advantage of the rebound in prices.
Restraint from Australia’s biggest iron ore exporters could “certainly help prices in the short term, over the next two years,” Caue Araujo, a principal consultant at SRK Consulting said by phone from Perth. “The supply side is sending a message that you shouldn’t expect supply to grow by that much, that we shouldn’t expect any surprises on the supply side in the next couple of years.”
Iron ore futures advanced 0.8 percent to 426.5 yuan ($63.87) a metric ton Thursday on the Dalian Commodity Exchange at 11:02 a.m. in Sydney.
Global trade in iron ore may grow 4 percent in 2017 as exported material continues to displace higher-cost domestic supply in China, according to Australia’s Department of Industry, Innovation and Science. China’s iron ore imports may rise about 2 percent to 974 million metric tons this year and by 0.7 per cent to 981 million tons in 2017, the department said in a report published earlier this month.
Australia’s two top suppliers may be adjusting the addition of new supply to accommodate weaker market conditions, Morgan Stanley analysts including Tom Price said last month, as the bank raised its iron ore outlook for this year and 2017.
Tempering Supply
A 24-month campaign of rail maintenance begun this year by BHP will crimp some output growth as the company strives to complete a program to reach a potential 290 million tons a year capacity in Western Australia, while Rio is having difficulties completing an autonomous train program that will help to raise annual shipments to 360 million tons. Rio’s work will limit output growth in 2017, the producer reiterated Tuesday.
Both BHP and Rio may have peak production rates that fall short of those capacity targets, Macquarie Group Ltd. analysts wrote in a July 12 note.
“It does seem at the margin that they are tempering supply and that clearly reflects the price,” Peter O’Connor, a Sydney-based analyst with Shaw and Partners Ltd., said by phone. “Their expansions have run their course, and though it may take them two or three years to top out we are now on the plateau of that curve.”
Fortescue Metals Group Ltd., Australia’s No. 3 supplier, has pledged to hold annual output to around 165 million tons, though reported last week full-year shipments of 169.4 million tons, citing mild weather that meant it experienced fewer-than-expected disruptions.
For a Gadfly commentary about Australia’s iron ore expansions, click here.
Continued supply growth from larger exporters will put pressure on prices in the medium term, as will the return of some marginal producers to the export market in response to the material’s price spike earlier this year, Citigroup Inc. analysts said last week. Prices may decline to $42 a metric ton in 2017 and to $38 a ton in 2018, the analysts wrote. Iron ore prices remain about 70 percent lower than a 2011 peak.
Source:The Australian