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COMMODITY Insights Bulletin - Iron Ore Q4, 2015 - Q1, 2016

COMMODITY Bulletin - Iron Ore Q4, 2015 - Q1, 2016

In the short term, the increase in low-cost production in Australia and Brazil will continue to put pressure on the price of iron ore as it outstrips the increase in demand. As a consequence, higher cost producers are likely to shut down operations but this will likely not cause significant reduction in the supply of iron ore. Medium and long term, the expectation is that low-cost supply will continue higher than demand as low cost iron ore expansion projects, principally in Australia and Brazil, are finalized and production ramped up. Although there should be less volatility in iron ore prices, there is no real expectation of a significant price increase.


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Price outlook

Iron ore prices1 for 62 percent fines Fe (CFR Tianjin port) witnessed a 23 percent decline over Q1 2015–Q1 2016. The decline during Q1 2016 was a consequence of oversupply primarily from Australia and Brazil and decline in steel production in China, which is responsible for about two-thirds of the overall seaborne demand.


Increasing global supply from the development of new low-cost capacities, particularly in Australia and Brazil, coupled with lower demand from China’s steel sector, is forecast to result in prices of about US$45 per tons in 2016.


At the current iron ore prices, several high cost producers are making large losses on each ton of iron ore produced. The sustained period of lower prices is expected to result in the closure of high cost capacities, as the financial losses of these companies are beginning to accumulate. Although these closures will provide some support to prices, new low cost capacities are being developed, particularly in Australia and Brazil, which will result in only a slight increase in prices. Furthermore, China’s steel production is expected to improve and this will result in growth of export volumes over the period 2016–20.


The iron ore prices are projected to grow at a CAGR of 4.8 percent, to reach US$54/tons in 2020, owing to the improved global demand scenario.


"Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016

Figure 1:	Spot prices of China’s iron ore imports  (Q4 2014–Q1 2016)

Source: IMF Primary Commodity Prices, International Monetary Fund, accessed April 2016

Figure 2: Prices of iron ore (2014–2020E)

Source: Consensus prices from Capital IQ, accessed April 2016

*Actual numbers for 2015 is not available on the database; E refers to estimated data


Supply and demand

Supply 2
  • During 2016–2019, global supply of iron ore is projected to grow at a modest pace, owing to the continued replacement of domestically produced iron ore in China with seaborne iron ore. Global supply of iron ore is forecast to increase at 4.1 percent in 2016, boosted by increased supply from Australia and Brazil.
  • In 2015, supply grew by about 8 percent to 1,422 million tons (mt), as a result of increased production in Australia and Brazil.
  • Australia’s exports of iron ore are estimated to have increased by 8.3 percent in 2015, to 813mt and are forecast to grow by 3.4 percent in 2016. These increases are expected to continue over the period 2016–2019, largely due to increased production from the Roy Hill mines, as they approach full capacity.
  • Despite the temporary closure of the BHP Billiton and Vale joint-owned Samarco mine, Brazil´s iron ore exports are forecast to grow by 7 percent in 2016 and by 5 percent in 2015.  This is largely because of the completion of Vale´s S11D Carajás expansion project and the subsequent ramp up in production.  Production at S11D is expected to increase over several years to eventually reach 90mt a year.
  • In November 2015, iron ore production ceased at Samarco because of a catastrophic tailings dam burst. The mine, which has a productive capacity of 32mt a year, may take several years to obtain the necessary environmental approvals to recommence operation. The Samarco mine is projected to remain closed over the medium term. If it reopens earlier, Brazil’s iron ore production would increase faster than projected.


2 "Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016

Figure 3: Global supply of iron ore (2014–2019F)

Source: RBC Capital Markets, Bulking Up – Iron ore prices stable while met coal prices rally, 05 April 2016, accessed April 2016

*Actual numbers for 2015 are not available in the broker reports, leveraged to build this CIB; E refers to estimated data



  • China’s demand growth from the steel industry witnessed a significant decline in 2015, resulting in about 1.4 percent decline in global imports of iron ore. The decline in consumption is expected to continue in 2016, with demand of iron ore reducing by 2 percent.
  • Beyond 2016, China is expected to remain the largest source of demand growth, mainly due to the decline in low-quality domestic production and steady growth in seaborne iron ores imports, backed by high-cost capacity curtailments in China.
  • Iron ore demand is expected to grow at a CAGR 1.6 percent over 2015–20, driven by increased imports from the key countries — China and India.
  • India is expected to transform from being a net exporter of iron ore in 2014, to importing about 46mt of iron ore in 2021. Although India is projected to become a significant source of growth in seaborne iron ore demand over the medium term, this may not be possible if the government mining restrictions are lifted or export duties are reduced. Further, there is some uncertainty around the projections for India’s steel production, which determines the level of domestic demand.


3 "Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016

Figure 4: Global demand of iron ore (2014–2019F)

Source: RBC Capital Markets, Bulking Up – Iron ore prices stable while met coal prices rally, 05 April 2016; accessed April 2016

Key developments

Ownership changes 4

The total value of the six M&A deals announced in Q1 2016 was US$0.03 billion as compared to the 13 deals in Q4 2015, valued at US$0.4 billion.


(Please note that the total number of M&A deals include all the announced deals, even those with undisclosed value. Out of the six deals in Q1 2016, three were undisclosed)


The significant decline in iron ore prices has arrested any major M&A activity in the iron ore sector, particularly in regards to struggling smaller producers and developers.


4 MergerMarket and Thomson One; accessed April 2016

Figure 5 Value of major deals announced in iron ore industry

Source: MergerMarket and Thomson One; accessed April 2016

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