Iron Ore: No Significant Recovery In Sight
We remain bearish iron ore on a multi-quarter horizon. We expect prices to trade within the USD95-115/tonne range over the remainder of 2014 and average USD105/tonne in 2015. The slump in iron ore prices, down 25% since January 2014, is unlikely to reverse significantly over the coming quarters. Increased output from major miners in Australia and Brazil will deepen the supply glut in the seaborne market, while import growth from China comes under pressure from the country's economic slowdown.
Admittedly, India's crackdown on illegal mining operations and the recent industrial unrest at Australia's Port Hedland could limit seaborne supplies and offer some support to prices in Q2-Q314. However, we do not expect these factors to spark a sustained price rally. Heading into 2015, declining import growth from China should offset the price-supportive impact of dwindling exports from India, while mining firms in Australia are unlikely to engage in a protracted dispute with labour unions for fears of jeopardising their expansion plans.
In our view, strong import demand for iron ore (up 21.0% y-o-y in the first four months of 2014) by Chinese steel mills will reverse as the steel industry's precarious fundamentals increasingly come to the fore in H214 ( see 'Chinese Steelmakers: Uphill Battle Ahead', May 02). Chinese steelmakers are already under pressure, as according to the China Iron and Steel Association (CISA), China's largest steelmakers posted a combined loss of CNY2.3bn (USD369mn) in Q114, the lowest profit since 2000.
|Little Respite In Sight|
|China Iron Ore Import Price, 62% Grade (USD/dry metric tonne, CFR)|