G Chandrashekhar

Ruddy outlook for iron ore

G Chandrashekhar | Updated on April 06, 2014

ECOPRINT/SHUTTERSTOCK.COM

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By 2015, when global economic recovery spurs infrastructure investments, demand for iron ore will rise sharply



If steel is the most critical industrial metal that drives economic growth, iron ore is the most critical input for steelmaking.

Not many countries are endowed with this ferrous mineral, a finite resource. Given the strong positive correlation between economic growth and steel consumption, demand for iron ore is directly related to steel production.

From 5.3 per cent last year, global steel production growth is set to slow to 3 per cent in 2014, gradually tapering to 2 per cent by 2017-18. World iron demand has showed fluctuating growth in recent years on the back of de-stocking, supply disruptions and occasional inventory building. World iron ore demand expanded by a mere 15 million tonnes (mt) to 1,400 mt in 2012, but showed a big jump to 1,580 mt the following year.

For 2014, the preliminary estimate is 1,640 mt. The rising volume of iron ore sea-borne supplies in recent years is expected to slow in 2014. From 1,146 mt in 2012, sea-borne supplies expanded to an estimated 1,285 mt in 2013. In 2014, however, they will grow at a slower pace to 1,365 mt. Hopefully, supplies should expand faster by 2015 when global economic growth is expected to return to trend and large investments are made in infrastructure projects, especially in emerging economies.

At over 600 mt a year, Australia is the world’s leading iron ore supplier, followed at a distance by Brazil with over 300 mt. In recent years, Australia has shown very consistent export growth; but others too are catching up.

China, the world’s largest producer of steel, is also the largest importer and consumer of iron ore. Recently, environmental restrictions have forced a reduction in steel output capacity, capping China’s effective steel capacity. So, utilisation rates are set to improve which, in turn, will drive demand for higher quality iron ore.

Outlook

The world iron ore market is at the crossroads. As steel capacity utilisation improves, there is incentive for mills to pay a premium price for higher grade ores, to maximise value from blast furnace. Coupled with sinter plant restrictions in China, this also means that demand for direct charge ores, such as lumps and pellets, will increase, just at the time when European steel returns to growth.

While there is unlikely to be any shortage of the raw material because of a number of projects in the pipeline, the price at which iron ore trades in the next two years will surely influence project approvals. The incentive price is widely agreed to be around $100 a tonne. So, prices now can potentially impact supply availability in the latter part of the decade. Many analysts have raised their price forecast for iron lump and iron ore pellets. On a three-six months view, supply will be strong and demand stable while inventory levels at origins and destinations will show a mixed trend.

It must be stated that concerns over pollution-related cutbacks are real. Although sentiment is weak, underlying demand remains robust.

On a longer term, say, 12 months, the view is neutral. On the whole, there will be displacement in H2 as supply growth continues. Experts forecast a full year 62 per cent Fe C&F China price at around $120/t. On a three-five year time frame, progressively the scenario may deteriorate as supplies increase and prices struggle to break the $100/t level sustainably.

India picture

India has been an exporter of iron ore as historically domestic consumption trailed production. However, given the finite nature of this critical natural resource and considering the needs of the domestic steel industry in the years ahead, trade and tariff restrictions are imposed from time to time.

Iron ore exports out of India have tapered significantly in the last two years following court imposed ban on mining.

Indian exports in the main comprise fines which, if not utilised, are seen as an environmental hazard. From 108 mt in 2010, iron ore export shipments declined to 81 mt in 2011, only to fall sharply to 33 mt and 16 mt in the next two years.

The year 2014 may see some improvement in export shipments, currently projected at 25 mt. In order to utilise fines, steelmakers have started setting up beneficiation plants for sintering and pelletisation.

Hopefully, the new Government will come up with a stable, long-term policy, taking into account the interests of all the stakeholders.

Published on April 06, 2014

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