Top Iron Ore Shipper Says Rally May Cool as Risks Lie in China

Krystal Chia

29 Sep 2020, 03:57 AM IST

(Bloomberg) -- Australia, the world’s biggest iron ore exporter, predicts a rally in prices may plateau and warned of risks to demand given the market’s reliance on China’s steelmaking industry.

The seaborne market should see a “cooling” toward the end of 2020 and potential shifts in Chinese steel output are the main driver for the iron ore price outlook, the Department of Industry, Science, Energy & Resources said in a quarterly report. Global steelmaking could contract sharply should a second coronavirus outbreak occur in China, or if Chinese government stimulus falls short of market expectations, it said.

Iron ore prices have stumbled after surging to the highest in more than six years earlier in September on supply disruptions in Brazil and record steel output in China. Market watchers have warned this month of a near-term pullback in prices, though Citigroup Inc. said strong Chinese demand will support prices in a $100 to $120 a ton range for the rest of the year.

Australia’s iron ore price outlook	2020	2021	2022
Free-on-board iron ore, 62% content	$79.50/ton	$71/ton	$64.80/ton

“China’s dominance in iron ore consumption gives it considerable capacity to set global prices, and Chinese importers are unlikely to accept historically high prices for iron ore over an extended period,” the department said. Chinese steel production is forecast to drop slightly to 987 million tons this year, before rebounding to more than 1 billion tons in 2021.

China imports more than 70% of seaborne iron ore to feed its steel industry, the world’s biggest. Australia dominates global iron ore supply and the department said it’s the first commodity export to earn the country more than A$100 billion in a single year, reaching that threshold in 2019-20.

Also underpinning prices in the short term are constraints on Brazilian supply, with Vale SA facing tougher regulatory requirements following a dam disaster and the coronavirus derailing production plans. The country’s production isn’t expected to return to normal levels until late 2022, the Australian department said.

In other forecasts and commentary:
Australia’s export volumes forecast to rise to 896 million tons in 2021 and 922 million tons in 2022 from 874 million tons this year. China is expected to import 1.2 billion tons of iron ore this year, 1.3 billion in 2021 and 1.4 billion in 2022. High iron ore prices and difficult economic conditions have accelerated the closure of steel mill operations in Europe and Japan