Iron Ore Outlook: Analysts Divided on Price

Iron Ore Outlook: Analysts Divided on PriceViews on the future of iron prices in 2014 vary widely, but they all take the same information about demand and production into account. Below we review how 2013 went for the metal, and how 2014 may progress.

A strong 2013

Demand for iron ore was relatively strong in 2013, according to Metal Miner. Indeed, iron mining companies — including big names like BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO) — have continued to invest in new projects that will increase the supply of available iron ore. This is an indication that iron companies believe the future of the metal in the coming years is a promising one. The Chinese market for iron ore has a significant impact on the demand for the metal worldwide, and China’s iron ore imports rose 9 percent in the first nine months of 2013 compared to the same period in 2012. The country’s steel industry is active, and the housing market is quite strong as well. Both of these industries depend on iron ore, creating a high demand for the metal in China. Furthermore, the country’s inventory of iron ore shrank rather than grew in 2013, indicating all imports were immediately used by end consumers rather than stockpiled, as is typical in a less heated market for the metal.

However, despite the strong import situation in China, some analysts feel iron ore is about to drop in price. This is due in part to the contention that the steel market in China is really overheated, with demand inflated to a level the market cannot support. The housing market in that country may also be headed for a contraction, according to Metal Miner. The performance of iron ore in 2013 is a situation many expect to see repeated in the coming year, though there is a notable difference of opinion among analysts.

Iron in 2014: The bears

Among those who believe the market will suffer in 2014 is Goldman Sachs (NYSE:GS). According to Goldman analysts, including Jeffrey Currie, the risk for iron ore is strong in the coming year. Price pressures are expected to emerge in the later months of 2014, pressing iron ore prices down to their lowest points since 2010. The company believes iron ore will enter a phase of surplus in the second and third quarters of 2014, and that prices will average $108 a ton in 2014. For comparison’s sake, raw iron ore sold for an average of $135 per ton at China’s Tianjin port in 2013.

Analysts at Metal Miner are also of the opinion that iron ore prices could drop quite a ways in 2014 due to supply factors. The major iron ore producers in Australia — Rio Tinto, BHP Billiton and Fortescue Metals (ASX:FMG) — reported extremely high production in the third and fourth quarters of 2013, leading to worries of a supply overhang. The decision these producers made to increase production earlier in 2013 may in fact have been a misstep, according to some analysts who are concerned at signs that the demand for iron will decrease in short order. Left with a large supply and lower demand, the market would naturally find iron prices decreasing.

Together, Rio, BHP and Vale (NYSE:VALE) comprise 70 percent of the seaborne iron ore trade, all of which is comsumed by China. But HSBC’s Purchasing Managers Index (PMI) for China has seen decreases below the 50 mark, which Metal Miner finds worrisome.

The bulls

On the other side of the iron ore story are those analysts who believe it has an impressive year ahead. Platts predicts a steady price.

“Global iron ore pellet premiums are expected to remain firm into the first half of 2014 as supply growth struggles to keep pace with an increase in global demand, market participants polled over the last month said,” according to the Platts article.

It notes that steel markets in China, Japan and South Korea are expected to drive the market for iron ore.

Bloomberg reported iron ore prices will increase in 2014, up from a July prediction that saw minimal declines in the price. This is due in part to the expansion of China’s economy in the third and fourth quarters of 2013.

“Prospects for the metal market depend importantly on Chinese demand,” according to the World Bank. However, the bank warns that ”If robust supply trends continue and weaker-than-anticipated demand growth materializes, prices could follow a path considerably lower than the baseline presented in this outlook.”