While much attention has been paid to iron ore’s volatility in the past few months, few mainstream media outlets have paid attention to forecasts for the next year.
Forecasting is tricky, but there are a few factors worth paying attention to.
Greg Canavan has recently been looking at the immediate future of iron ore here.
But with longer term predictions, it’s always a case of supply and demand.
China’s demand for iron ore
Firstly, as iron ore is tied very closely with steel production, it tends to trend closely with global economic growth, in particular China’s.
China consumes a lot of iron ore because it produces 50.3% of the world’s steel.
So Chinese economic growth is a major factor.
Current IMF projections of Chinese economic growth for 2019 have it at 6.3%.
Growth is projected to slow moderately over the coming five years as China modernises its economy.
This is likely to create downward pressure on iron ore prices as China’s demand for iron ore decreases.
Short-, medium- and long-term future of iron ore
On the supply side of the equation, Vale, a Brazilian multinational mining company, has been ramping up production in its local market. It is also increasingly going for higher purity iron ore production.
Brazilian iron ore production increased 5% last year, and 4% this year. However, it has recently had a disaster at one of its mines and may experience significant production curbs as safety measures are put in place.’
As a result, it is possible that benchmark 62% fines could spike to as high as $100 briefly, then settle around the $85 range for the second half of the year.
Ultimately, it may be a slowdown in global growth as a result of the US-China trade war that could create the immediate difficulties for iron ore prices.
Mid-future, i.e. over the next 12 months, there is the very real prospect of a global recession which Markets & Money’s Vern Gowdie excellently describes here.
Longer term, Australia’s Department of Industry is saying that 2020 could bring a drop of 12% from the price we have seen over the last six months.
With these factors in mind, investors may consider locking in price gains on big name mining stocks soon.
At the same time, mining stocks that do not rely on iron ore as a main source of revenue could be worth a look.
Markets and Money’s coverage of iron ore is extensive.
His most recent article on the implications of the BDI can be found here.
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