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Iron ore to bottom in 2018 ahead of meaningful recovery, Bernstein predicts

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


Iron ore to bottom in 2018 ahead of meaningful recovery, Bernstein predicts

News around trade negotiations again drove markets last week as U.S. President Donald Trump signed off on allowing relief from steel quotas on imports from South Korea, Brazil and Argentina and on aluminum imports from Argentina.

The quotas were imposed in March as part of the commerce department's push to offer quotas to allies in exchange for a permanent exemption to steel and aluminum tariffs.

The U.S. also announced a new trade deal with Mexico, under which regional automotive content will be increased to 75% as compared to a level of 62.5% under the North American Free Trade Agreement.

Meanwhile, talks between Canada and U.S. trade officials faltered, weighing on market sentiment as Trump flagged that there was no political necessity to keep Canada in the new NAFTA deal.

Equity benchmarks and metals prices also took a hit on news that the Trump administration could impose new tariffs on China shortly.

Price ring

With the exception of aluminum, all base metals finished the week in the red.

Zinc plummeted 2.6% to US$2,475/t and nickel was down 1.0% to US$13,200/t, while copper and lead dropped 0.5% and 0.4%, respectively, to US$6,063/t and US$2,071/t.

However, aluminum rose 3.2% to US$2,127/t.

Iron ore remained flat at US$62.0/t last week, more than 21% below levels seen a year ago.

Gold and silver lost pace, with gold sliding 0.4% to US$1,200/oz and silver dropping 2.0% to US$14.5/oz.

Talking points

2018 is set to be the bottom of the current iron ore price cycle, which is poised to spiral higher on the back of an accelerating supply deficit, according to Sanford C. Bernstein.

In a Sep. 3 note, the team increased its long-term price forecast for iron ore to US$75/t, against what they called a "dire" consensus expectation, amid expectations that a widening gap of growing demand and declining supply will boost prices.

"We see a situation where demand for iron ore will continue to grow. The hard landing in the Chinese economy in 2015/16 did not represent the emergence of a new phase in the economic life of mankind; one where economic growth ceased to be reliant on the supply of raw materials. Rather, it was a recessionary slowdown akin to all the others we have seen through time," the analysts wrote.

The team expects a slight oversupply in iron ore markets to persist in 2018 before moving into a slight deficit in 2019 as producers remain reluctant to accelerate output at current price levels of between US$60/t and US$65/t. 2020 will mark the emergence of a structural deficit, according to Bernstein, which will open a deficit window of at least three years until 2023.

Overall, Bernstein expects demand for iron ore to grow by about 2.2% per annum between 2019 and 2025, while global supply is thought to decline by some 1.1% per annum, mainly driven by lower production in China.

Against this backdrop, the team anticipates that even new projects in the pipeline would "only just about balance" the demand requirements and even then only from 2023 onward.

"The conclusion is clear, we see 2018 as the bottom of the current iron ore price cycle with prices set to trend upwards from here," the team wrote. "Prices [are] set to recover meaningfully from here."

Bernstein noted that there could even be "dramatic" fluctuations where prices will move above the US$100/t mark.

"However, such a move would not be sustainable and would, in any event, reverse itself over time," the team added.

Financings

Aluminum Corp. of China Ltd. announced plans to issue 12.71 billion Chinese yuan in shares as it seeks to bring its stake in four subsidiaries to 100%. The company will issue a total of 2,118,874,715 shares at 6 yuan apiece to acquire an outstanding interest of 25.67% in Baotou Aluminum Co. Ltd., 30.80% in Chalco Shandong Co. Ltd., 36.90% of Chalco Zhongzhou Aluminum Co. Ltd. and 81.14% of Chalco Mining Co. Ltd.

Separately, a wholly owned unit of Chalco will issue US$400 million worth of 4.875% guaranteed senior notes due 2021. It will use the proceeds for refinancing existing obligations, and general corporate purposes.

Polymetal International PLC secured a long-term, five-year, fixed-rate loan of US$250 million with Alfa-Bank to refinance maturing debt.

Chaarat Gold Holdings Ltd. outlined plans for a convertible debt placement targeting up to US$100 million to finance acquisitions, project development and debt refinancing. The company has so far received commitments totaling US$26 million that will go toward refinancing existing bonds, while it aims to complete a second round of financing in September. Proceeds will be used to finance a pending acquisition of a polymetallic property in the Commonwealth of Independent States, development at the company's Tulkubash gold-silver project in Kyrgyzstan and refinancing of existing notes.

On the IPO front, FMC Corp.'s lithium business spinoff, Livent Corp., is said to be considering a public listing in New York that could raise US$100 million. FMC will hold 80% of Livent once it is listed and will also offer a US$400 million revolving credit facility to the spinoff.

In China, Shandong Gold Mining Co. Ltd. is targeting a US$1 billion float in Hong Kong as it looks to become one of the world's largest gold companies through acquisitions. The company will sell 377 million shares in the transaction after securing approval from Hong Kong's listing committee, with proceeds earmarked to repay US$972 million in loans.

As of Aug. 31, US$1 was equivalent to 6.83 Chinese yuan.