Tight supply and demand of iron ore to stay

High quality seaborne iron ore is an important aspect to blast-furnace steel making, which represents 90 per cent of China’s steel making capacity.

“In China of course, the blast furnace-basic oxygen furnace (BF-BOF) route represents 90 per cent of steel–making capacity, with the average facility being just 10–12 years old,” BHP stated.

The likelihood of a West African supply of iron ore coming online may result in higher-cost, lower value-in-use iron ore asset in Australia or Brazil.

“This implies that it will be even more important to create competitive advantage and to grow value through driving exceptional operational performance,” the company stated.

Janus Henderson head of global natural resources Daniel Sullivan has also highlighted the “favourable” conditions for iron ore.

“The outlook for steel and iron ore is favourable for early 2021 and we have reduced underweights by adding to Fortescue, BHP and Champion Iron,” he said.

“We expect a tight iron ore market in early 2021, a copper deficit from Q2, a tightly balanced aluminium market in China and similarly tight palladium and coking coal markets.”

Sullivan said Chinese policies on steel, raw materials, and renewable energy may impose risks.

“In an attempt to counter the strength in iron ore prices, amidst a burgeoning trade dispute with Australia, Beijing’s newly released blueprint for its steel industry over the next five years includes cutting its reliance on the supply of raw materials it does not control,” he said.

However, Fitch Solutions believe that iron ore prices have already peaked with slower demand expected in the first half of 2021.

Fitch Solutions has forecast that the iron ore price per tonne will drop from $US120 ($155) in the 2021 financial year to $US100 in the 2022 financial year.

“In our view, prices will likely grind lower during the first half of 2021 as supply improves and demand growth slows,” Fitch Solutions stated.

“Looking beyond 2021, we expect iron ore prices to follow a multi-year downtrend.”