Analysts’ estimates for iron ore
The market is factoring in very low iron ore prices following the supply and demand mismatch scenario that began in mid-2014. Citigroup’s (C) estimates of $40 per ton are backed by Roy Hill’s low-cost tons, which are ready to hit the market in full force next year.
Clarksons Platou Securities also forecasts iron ore prices to hit $40 per ton. Credit Lyonnais Securities Asia has recently cut its price forecasts by up to 25% to $45 per ton through 2018. The downgrade comes on the belief of peak steel in China coupled with more supply hitting the market in years to come.
UBS has iron ore price forecasts of $51 per ton in 2H15 and $50 per ton for 2016.
Goldman Sachs Group is also quite wary of the demand-supply imbalance and estimates the prices to be $54 per ton for 2015 and $44 per ton for 2016.
Credit Suisse has estimates of $56 per ton for 2015 and $53 per ton for 2016.
What’s in the consensus?
The median, as compiled by Bloomberg, is for $50 per ton for 4Q15 and $55.50 per ton for 2016. After that, the market expects China’s demand to stabilize amid the high-cost miners’ exit, leading to an upside and prices settling at $63 per ton.
Who should be worried?
BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE) might be the only players who would be making some money at the consensus iron ore prices. Roy Hill and Fortescue Metals Group (FSUGY) might just survive the downturn if it isn’t too long, otherwise their debt commitments could come back to haunt them. Producers like Cliffs Natural Resources (CLF) are coming under increasing pressure given their debt profile and China’s increasing steel exports to the US (CLF’s main market) amid weak domestic demand growth.
Investors can also look at ETFs like the SPDR S&P Metals and Mining ETF (XME) to invest in this sector without picking individual companies. CLF forms 4% of its holdings.