Iron ore prices have been slashed from record highs, and UBS thinks they’ll go lower
Link copied to
Iron ore prices have been savaged in recent weeks and months, falling more than 50% from giddy highs of over US$230/t to trade at around US$106/t this morning.
Fastmarkets MB saw a US$9.44/t drop to US$107.21/t in benchmark 62% fines.
Other pricing agencies reported a 6.9% drop to US$106.35/t as traders digest steel output restrictions and a sliding Chinese property market headlined by the potential collapse of property giant Evergrande.
And if iron ore prices have already come off their high octane boil, long bearish analysts at UBS say they’re going to run down even further, projecting in a note this morning that iron ore prices will drop below US$100/t before the end of the year.
The majors were savaged in morning trade, with Fortescue Metals Group (ASX:FMG) down 10.1% or $1.75 to $15.50 as of 12.15AEST.
BHP (ASX:BHP) was off a tick over 3% to $39.42, having traded at record levels of more than $53 a share just a few weeks ago.
UBS used the opportunity to reset the dial on the big miners, maintaining its sell rating on Rio and knocking down its share price target from $102 to $86. Andrew Forrest’s FMG meanwhile has been downgraded from a hold to a sell, with UBS dropping its price target from $18 to $15 per share.
After rolling out the most eyewatering dividend payouts investors have ever seen in 2021, UBS now expects earnings from the big miners to be 15% lower than previously forecast in 2022.
The big driver behind the dramatic slide in iron ore prices in recent weeks and months has been emissions related cuts to steel production, with China determined to keep crude steel output around the 1.05Bt level the sector churned out in 2020.
It had been tracking to obliterate that in the first half of the year, as steel output tracked 12% up year on year.
UBS now believes steel output will be around 1.07Bt in 2021-22 and remain flat in 2022-23, down around 5% on its previous forecast of 1.131Bt.
With lower demand and seaborne supply rising around 2% year on year, UBS’ boffins now think the market will be in surplus this half.
They believe iron ore prices will now average US$89/t in 2022, 12% lower than their previous estimate of US$101/t.
“China steel production has disappointed due to weak property & infrastructure demand and as some steel mills are cutting production to meet the central govt target of flat output y/y in CY21,” UBS said.
“Iron ore supply has been broadly stable in 2021 but will lift over the next few months if Vale and Rio Tinto are able to achieve their 2021 guidance.”
“This will result in a material build in iron ore inventories at Chinese ports and a sharper fall in iron ore prices over the next 6 months than previously expected.”
“Spot prices have already fallen from US$220/t in July to ~US $120/t.”
UBS has maintained its medium to long term forecast of iron ore prices eventually dropping to US$65/t.
“We expect prices to stabilise ~$65/t medium-term, which is the 90th percentile on the value-in-use cost curve,” UBS said.
We downgrade 2021 prices to US$163/mt, 2022 to US$89/mt and 2023 to US$80/mt. Our long-term price (US$65/t real, 62% fines cfr) remains unchanged.”
Long term UBS sees as much as 160Mt of latent capacity coming on board from the major iron ore miners post-2021, with Brazil’s Vale potentially adding 96Mt.
Another 30Mt could come from miners at the smaller end of the spectrum like MinRes. Rio Tinto is aiming to ramp up to as much as 360Mtpa and BHP, which recently received clearance to increase its ship-loading capacity at Port Hedland from 290Mtpa to 330Mtpa, could creep incrementally by 10-15Mtpa.
There is a caveat to that, UBS said. Rio and Vale have regularly failed to meet their ramp up targets, and Vale has already announced it will ramp up to a run rate of only 370Mtpa by 2022 rather than the 400Mtpa it had been planning.
However, an increase in scrap steel by China and the potential introduction of up to 200Mtpa from the Chinese-influenced Simandou project in Guinea from 2026-2030 could also impact the market long-term.
“The high prices in 2019-2021 have been driven by supply disruption (after the Brumadinho dam disaster and due to Covid) and strong demand from China,” UBS said.
“We expect supply from Brazil/ Australia to lift materially in 2021-25, for Guinea to start shipping iron ore from 2026, and for steel scrap to increasingly displace iron ore in China.”