Supply to increase
As we’ve seen previously in the series, the supply side for iron ore remains strong, with the ramp-up of Roy Hill and Vale’s (VALE) S11D remaining on track.
We’ve also discussed that at elevated price levels of iron ore, some marginal suppliers also get incentives to start producing at higher levels. Elevated price levels point to ongoing additions if iron ore prices remain high.
Australia cuts price forecast
Keeping in mind this increased production and the tepid outlook for demand growth, especially from China, Australia has lowered its price forecasts for iron ore for 2016 and 2017.
According to a report, “Despite the large movements in prices, the market fundamentals are broadly unchanged – demand growth is slow and the market remains well-supplied.” Australia has lowered its 2017 price forecast from $55 to $44 per ton.
In the future, any further announcements of stimulus measures or relaxation in the rules in the futures market could spark another rally in iron ore prices. In the absence of sustainable physical demand-supply fundamental backing, however, the rally could be short-lived.
Note that the pullback in iron ore prices isn’t something that iron ore majors are too worried about. They’ve been following the policy of higher volumes at lower costs to drive out marginal suppliers.
Cliffs Natural Resources (CLF), a US-focused (QQQ) (VTI) iron ore pellet producer, is shielded to a large extent from the volatility of seaborne iron ore prices. However, volatility will continue to indirectly impact the company’s fortunes.