Morgan Stanley has a useful note out today on the projected price of iron ore:
The spot iron ore price likely peaked last month at US$159/t (62% Fe CFR) and, in our view, will trend lower over the remainder of the year. We are clearly not alone in this view – consensus forecasts for this quarter and the calendar year averages are US$127/t and US$121/t, respectively. However, we think the CY consensus forecast is overly negative as it implies prices will need to average US$114/t over the remainder of the year. Our forecast for CY13 is US$133/t, implying a CY average of US$129/t over the remainder of the year.
MS says the market is overly bearish. At $145 and with unprecedented spreads to steel, I would not describe the market in such a way. That does not mean the whole thing is about to reverse. As MS says, port stocks are still low. On the other hand as I’ve argued, that may be a permanent feature of the new market as hoarders are scattered by oversupply fears.
Still, I don’t expect a whole lot more downside pressure until deeper into the second half, either, so won’t complain too much.
MS also supplies a fascinating long term chart of the supply demand balance. The years run from 2005 to 2018:
Note 2013 is the first year in surplus then the gap blows out, and out, and OUT! At a $300 million tonnes surplus in 2018, iron should be trading at about $25. And that’s assuming quite aggressive demand growth.
Eighteen months ago, this same MS chart read as a nearly endless supply deficit. I’d be prepared to bet that in another eighteen months it’ll change again, with both demand and supply projections radically reduced, but a large surplus will remain. I expect a price equilibrium around $80.
