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Strong iron ore prices may persist in 2019, analysts say

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Strong iron ore prices may persist in 2019, analysts say

SNL Image

Iron ore being loaded onto a ship in Australia.
Source: Associated Press

Iron ore prices, recently topping US$100/t for the first time in five years, look set to remain strong in 2019, analysts say, though some see a pullback on the horizon.

"We have a fade in the pricing," said Christopher Terry, a Deutsche Bank mining analyst, referring to his near-term price forecast. Terry sees iron ore prices hanging on to some of the gains made in 2019 — it traded in the low US$70/t range at the start of the year — but pulling back from US$100/t in the coming months.

S&P Global Market Intelligence's Commodity Briefing Service recently raised its 2019 forecast from US$84.4/t to US$87/t, citing scarcity in the seaborne iron ore trade. Meanwhile, S&P Global Platts reports that most analysts have iron ore price targets of between US$82/t and US$92/t including cost and freight, or CFR.

Iron ore prices began to surge in January after the deadly Brumadinho tailings disaster at Vale SA's Feijao iron ore mine in Brazil. As a result of mine closures and heightened scrutiny of the safety of tailings dams in Brazil, Vale said it had cut about 90 million tonnes in annual capacity.

To Terry, the impact on supply following Brumadinho has largely been baked into the price with some supply response from producers filling the gap and the worst possibly over in Brazil for Vale. "We think we're now through what we call peak tightness," he said.

Still, he noted that the situation in Brazil was fluid enough to hold surprises for the sector.

Paul Gait, an analyst with Bernstein Research, sees US$100/t as a reasonable price for iron ore in this market. "Given that we called US$100/t iron ore in the middle of last year, I have to say that I think this support could last for a while!" he told S&P Global Market Intelligence.

Other analysts also see a price pullback in the works. "Going forward, we expect demand to soften while supply to partially recover," Goldman Sachs analysts recently said according to the Financial Times. "The $100 a tonne iron price, while justified for May and June, also reflects a market that is at peak tightness."

From a supply perspective, one key issue hanging over the market is the status of Vale's Brucutu mine, which has an annual capacity of about 30 Mt of iron ore. The restart of the mine, shut down after the Brumadinho disaster, has been delayed amid legal uncertainty.

"I think right now, from an investment standpoint, whether it's online or not is splitting the bulls and bears," Terry said.

B. Riley FBR analyst Lucas Pipes, as others, told S&P Global Market Intelligence that iron ore prices are backed by the lack of a strong supply response by the market, a point he made in a recent note. "Overall, we think the iron ore supply response will be limited in 2019, which will help support current [Platts Iron Ore Index] pricing," he wrote May 22, remarking on the US$100/t iron ore price.

Pipes noted that amid supply cuts in Brazil, Australian producers are already working at full capacity, while China's output may be muted on the back of regulatory constraints.

Meanwhile, there has been strong demand for iron ore, the main ingredient in steel, BMO Capital Markets analysts recently noted: "Iron ore has bucked the trend ... as solid Chinese demand and continued supply shortages from the seaborne market continue to push the price higher."

Operating rates of Chinese blast furnaces were up 0.93% year over year in May, the analysts noted, citing a survey.

Maximilian Court, a senior commodities analyst with S&P Global Market Intelligence, pointed to mine output in raising the iron ore price forecast to US$87/t.

"Indeed, disruptions at key global mines have increased our expectation for a seaborne deficit despite the requirement for nontraditional suppliers to respond quickly to this deficit that looks set to increase from 29 Mt to 36 Mt this year," Court wrote May 23.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.