Iron ore price back below $50

The correction is the result of near and longer-term supply and demand dynamics (in short: rising output in Australia and slowing demand in China) and many factors are  stacked against a seaborne iron ore price above $50:

• The price spike this year and particularly since March was purely a speculative bubble and not an indicator of improving demand
• Chinese port stocks above 100 million tonnes for the first time since February last year is evidence of opportunistic buying and slack in the market
• As much as 50m tonnes steel capacity came back online this year, but China’s swing steelmakers’ margins are shrinking fast and they could exit the market just as quickly
• Beijing is continuing its program of eliminating chronic overcapacity in heavy industry which goes hand-in-hand with stricter pollution controls
• After three decades of growth China’s own steel industry association said steel output already reached its peak in 2014
• US and other countries’ anti-dumping policies mean Chinese blast furnaces can’t export their way out of trouble
• China’s accumulated steel output will top 10 billion tonnes this year, providing a huge reserve of scrap
• With more than 200m tonnes of capacity closed in three years, the remaining domestic Chinese miners may hang on for longer
• Global output is still growing – an estimated 180 million tonnes of additional supply will enter seaborne trade through 2020
• Additional tonnage is on the left of the cost-curve – cash costs at the Big 3 have been cut by half since 2012 and are heading below $10 a tonne
• Roy Hill is ramping up, Vale’s S11D is on target for end-2016, Rio Tinto’s Silvergrass will take less than a year to build and further out the likes of Simandou, Zanaga and Central Eyre (not to mention a resurgent Iran) could fill any gaps opening up
• Record-low freight rates have shrunk the differential between FOB and landed costs, removing another layer of potential per-tonne-profit
• Some marginal miners encouraged by $50-plus prices restarted production and a chunk of this supply is hedged
• Once the number three exporter, India has lifted export duties for  low-grade ore and may soon do the same for 58% Fe and up

Even before the recent drop, the consensus forecast of analysts polled by FocusEconomics was a sub-$50 average during the second quarter. Of the 17 analysts polled the most bearish was JP Morgan at an average of just $38, while even the most optimistic, Oxford Analytics saw the price topping out at $55.

The median forecast for 2017 is even more pessimistic at $44.80 over the course of the year according to FocusEconomics data.