Key Variables: Why Pressure on Iron Ore Prices Could Persist
Sustained recovery difficult
Any sustained recovery of iron ore above $60–$65 per ton seems to be unlikely, given the structural nature of the supply surplus that is flooding the markets. There are still more projects in the pipeline, namely S11D by Vale SA (VALE), BHP Billiton’s (BHP) (BLT) and Rio Tinto’s (RIO) planned expansions in Australia, and the Roy Hill project by Hancock Prospecting.
On the other hand, China’s weaker demand, based on the factors discussed previously, seems to be holding ground. Both of these factors won’t let iron ore prices run up. This is putting increasing pressure on iron ore companies, including Cliffs Natural Resources (CLF).
Marginal production needs to go
The only support can come from closing down marginal production capacity in China. According to some sources, this has already started. However, even for that to continue, prices need to remain lower over a longer period. Otherwise, these capacities will come back online.
Atlas Iron has come back in full force after temporarily shutting down its operations when iron ore prices touched ten-year lows in April.
Market is factoring a downside
The market is also factoring a downside from the current iron ore price levels, as seen in the graph above. It depicts the consolidated iron ore price forecasts as expected by the analysts. According to investment bank Citigroup, iron ore prices should fall to $48 per ton in 3Q15 and may be as low as $38 per ton in 4Q15. Goldman Sachs, on the other hand, has been quite vocal about iron ore prices falling below $50 per ton over the coming months.
Investors can also look at ETFs like the SPDR S&P Metals and Mining ETF (XME) to invest in this sector without picking individual companies.
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