[Iron Ore] Deutsche Bank expects a downside risks in Iron Ore

UNITED KINGDOM July 30 2015 10:26 AM

LONDON (Scrap Register): Although Deutsche Bank has left their global steel production forecast unchanged at +1.3%, hitting this forecast does depend on a recovery in global, and especially Chinese steel production.

Deutsche Bank sees the risks of an H2 recovery as evenly balanced, with continuing monetary easing and fiscal stimulus measures as positives. Deutsche Bank concedes that so far there is very little evidence of these measures having an impact on the “old economy”.

The downside risks are a seasonal slowdown in July / August in China, and some near-term shutdowns due to poor profitability on the downside. A recovery in the Chinese property sector and easing monetary and fiscal policy should lead to a recovery in 2016, propelling production growth to +3.5%.

The iron ore price has rebounded by c.30% from its March lows, whilst the Q3 coking coal price settlement is down 15%. We think the contrasting fortunes in these two materials highlights China’s varying degree of import dependency.

Coking coal imports are a balancing item to Chinese domestic demand, whilst China is very dependent on imported iron ore. Therefore, any external supply constraint is likely to have a much bigger impact on the price.

The supply side in iron ore has responded very quickly to the low iron ore price environment. Chinese production is down c.10% year to date and Chinese imports from the non-traditional suppliers such as Malaysia, Iran, Chile, Peru and the CIS is down 45%. These actions have balanced the market more rapidly than anticipated, and it only took some disruptions in Australia for the price to respond to falling Chinese iron ore stocks.

On the flip side the industry has reduced median costs by c.USD19/t over the past six months helped by favourable freight, currency and diesel prices. The price rally and these cost cuts will be enough to give some of the high cost mid-tier producers the ability to survive for a bit longer.

Deutsche Bank thinks that c.50Mt of mid-tier production from either Brazil or Australia still needs to come out of the market, and this will only happen at lower prices. As a result, Deutsche Bank has upgraded their 2015 price forecast by 7%, but downgraded their 2016 price forecast by 6% to USD56/t.