Why Iron Ore Prices Could Slip Back from the Recent Rebound
(Continued from Prior Part)
Supply outlook strong
While Vale SA (VALE) maintained that it will reduce ~30 million tons of high-cost production, it would have minimal impact on the overall supply as it has ~50 million tons in inventory. Also, its 90 million tons per year S11D project is likely to come online by 2018.
Rio Tinto (RIO) has lowered its 2015 iron ore production guidance by 10 million tons to 340 million tons. On the other hand, BHP Billiton (BHP) (BLT) exceeded iron ore shipments for 2Q15 and maintained its 2015 production guidance at 270 million tons. Further productivity improvements could increase its capacity to 290 million tons.
2015 projects
Gina Rinehart’s $10 billion Roy Hill project is also on schedule to come online later this year. Its full production capacity is estimated to be 55 million tons per year once it ramps up fully.
While newer, low-cost projects are letting big companies stay afloat in this tight iron ore price environment, smaller, high-debt companies such as Cliffs Natural Resources (CLF) are being choked. The chart above shows the dramatic fall of CLF since the start of 2015.
The iShares MSCI Global Metals & Mining Producers ETF (PICK) is a good way to get exposure to the iron ore sector without choosing individual companies. BHP Billiton, Rio Tinto, and Vale form about 32.2% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in metal and mining companies.
Iron ore price outlook
As we discussed previously in this series, China’s fundamentals remain weak and its growth is faltering. China remains the single most important market for commodities, and any negative outlook there could translate into weakness in commodities. Higher supply is worsening the scenario.
Goldman Sachs also believes that iron ore prices could fall by ~30% over the next 18 months due to supply expansions amid weakening demand.
Taking into consideration the above factors, iron ore seems to be poised for a negative long-term trajectory. For the latest updates, please visit Market Realist’s Iron Ore page.
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