Tim Treadgold is a Perth-based journalist who has been covering the resources sector for more than 40 years.

The iron ore price revival which followed Brazil’s dam disasters might last longer than expected with fresh studies pencilling in a target price of $US100 ($142) a tonne which, if correct, means the local rally in iron ore stocks could continue for at least the rest of the year.

Hints of a “mini-boom” in iron ore could be seen in trading last week when Mt Gibson Iron (ASX:MGX) surged to a 12-month share-price high, and Fortescue Metals (ASX:FMG) came close to topping a high reached last month when Brazil’s problems were making headlines.

What’s happening now is that analysts are shifting their focus from the immediate impact on mining operations in Brazil to the long-term effects on global supply of tougher government regulations on mine operations, especially dam safety, and working that into long-term supply and price projections.

Citi, one of the investment banks to refresh its iron ore view, now reckons the average benchmark price for iron ore will be around where it is now at close to $US88/t for all of 2019, with surges to the $US100 mark.

“Stay bullish and buy the dips,” is Citi’s advice, because: “the implications of the Brazilian supply disruptions do not yet appear to be fully priced.”

Macquarie echoed Citi’s sentiment without being as specific on prices.

But sees demand building in the iron ore market as Chinese steel mills re-stock ahead of their busiest time of the year after the winter slowdown, a period when government regulations restrict operating hours to limit air pollution.

Signals detected by Macquarie which point to a higher iron ore price over the next few months include confidence that China’s steel mills will soon return to the market ahead of peak production season: “supporting iron ore demand in the near term”.

The key to Citi’s view, and the reason for its tip of a return to iron ore selling for $US100/t is an estimate that the global market is “missing” 81 million tonnes a year of Brazilian supply.

To put that number into perspective, Citi reckons it’s the equivalent of a 4 per cent shortfall in the overall market or the same as a 4-million-barrel-a-day oil-supply shock, which would be three-times the recent production cuts by members of the OPEC oil cartel.

Making up the 81mt shortfall might not be possible, according to the banks, with Australia’s two biggest iron producers, BHP and Rio Tinto, likely to lift output by a combined 15mt as they accelerate ongoing ‘de-bottlenecking” projects.

Smaller miners could also increase production but that’s when a major blockage in the Australian iron ore industry becomes a critical factor.

Port Hedland, the busiest iron ore port in the world, is effectively full, with limits already imposed on shipping movements.

India, according to Citi, could deliver an extra 10mt a year, and China might be able to boost its domestic production by 15mt.

But what Citi and Macquarie really see is a steadily worsening situation as short-term measures taken to plug the immediate effects of the Brazilian outage, such as running down port and mine-site stockpiles, run their course.

Crunch time for iron ore is seen as mid-year and could last until Christmas — and perhaps beyond if government regulations inhibit a production recovery.

Current conditions in the iron ore market are seen as a form of “phony war” with emergency supplies satisfying the demands of steel mills and preventing a rush to stock up.

“The market is not presently panicking on iron ore shortage as the outlook for Chinese and global demand growth is relatively uncertain,” Citi said.

“Vale, Brazil’s biggest producer, may de-stock up to 20mt and steel mills are holding off buying.

“Eventually, de-stocking will come to an end and the market could rally sharply.” Citi listed five factors for feeling bullish about the iron ore outlook:

  • Chinese steel mills restocking, which will follow a period of reduced iron ore purchases in the immediate period after the Brazilian outage to avoid paying the current high price, a policy which could see the mills having to “urgently re-stock”;
  • Signs of fresh iron ore supply disruptions such as an auction of Indian mines next year, a process which could impede production;
  • Indications of increasing steel demand in China after the traditional New Year slowdown, aided by government economic stimulus to ward off the worst effects of the trade war with the US;
  • Changes to the steel-making mix in China as profit margins from blast furnaces, which mainly use iron ore, exceed the profit margins of electric-arc furnaces, which prefer scrap iron as a feedstock; and
  • Falling Brazilian shipping volumes as stockpiles run down, with the second half of the year a potential crisis period.

“Risks to our tactically bullish view are numerous, both to the upside and the downside,” Citi said. “However, we feel the risks skew to the upside.”