As per October 2016 updates, Australia has raised price forecasts for iron ore and coal, which fall under the highest grossing commodity exports. As per new resources and energy quarterly report, the Department of Industry, Innovation and Science recently declared that the iron ore price outlook this year has now surged by 10 percent and this brings the price rise from $44.20 per ton to $48.50 per ton. On the other hand, the coking coal forecast has seen an enormous spike of 16 percent from $85.60 per ton to $99.40 per ton. This has been noted at the back of an unexpected strong demand from China’s construction sector. Then unanticipated supply disruptions also added to the boost. As a result, prices for most of the raw materials being used for construction and steel-making have been growing as seen in the last three months. On the other hand, there was a market expectation of great slips in prices. Let us look at the following to understand this in a better way:
China stimulus measures: The mainland government rolled out stimulus measures to boost home sales to reduce large inventories in an effort to limit an economic slowdown. This attributed to the upturn to the strength of the Chinese construction sector. Prices for most construction and steel making raw materials continued to grow in the last few months.
Prices on run: Iron ore prices have been going up and have even been at $55 a ton, a 30% growth year to date. Same is the case with coking coal with prices getting doubled to above $220 a ton.
Improvement in outlook but not up to the market prices: The current forecast prices have been still considered below current market prices, which again leaves some scope for the two commodities. It is also to be noted that Australia’s price forecast for iron ore was $45 a ton, and for coking coal, the same was $107.50 a ton for 2017.
Tight supply of coal: Coal resurgence comes on the back of tighter supply. China has also been cutting over capacity and curbing local production to improve air quality, leading to a shortage currently. Coal still remains a dominant source of power generation worldwide despite the increasing use of other sources. However, the natural gas and renewables are eating away coal’s share in rapid pace. The clean power plan announced in August 2015 by the US Environmental protection agency calls for CO
2 reduction of 32% by 2030 from 2005 levels. These plans would certainly impact the operations of more coal based power units. This will result into power units either being idled or converted to natural gas based units, affecting the long –term prospects of coal stocks.
Iron price may be in pressure: China accounts for two-third of the seaborne iron ore trade and is likely to reduce imports of the new raw material as demand from domestic steel makers weakens. The China iron and steel association had forecasted iron ore imports would fall to 920 million metric tons from 953 million in 2015. Major iron ore miners planned to increase output again in 2016, even with Chinese demand expected to decline for the second year in a row. Over the next three years, about 250 million MT of new supply would hit an already saturated market, as iron ore producers have not curtailed production plans. The bulk of the new production will come from BHP Billiton, Rio Tinto and Vale. The iron ore market may remain in substantial surplus beyond 2020 while Chinese demand continues to wane. Iron ore prices would face further downward pressure.
Oversupplied property market and cut in steelmaking capacity:Chinese residential property market has remained oversupplied even with a draw down in inventories. Furthermore, the Chinese government is continuously making efforts on reducing the excess steelmaking capacity. The Chinese government’s move to keep a check on excess steelmaking capacity is expected to result in lowering the demand for iron ore and metallurgical coal. China’s coal production has dropped in September with the government’s efforts to reverse some output restrictions. It has been reported that coal output by the world’s largest miner dropped 0.4% from August to 276.96 million metric ton in the last month. Production also slipped 12.3% from August and has declined 10.5% in the first nine months. The production of the fuel has also seen a drop after the government ordered miners to curtail the output to the equivalent of 276 days of production against the 330 days. However, the policy has been revamped and some miners have been allowed to increase output to cool prices that surged more than 50% this year.
As of now and given the current scenario, the coal price spike (if maintained over the full year) is expected to add about $29 billion to Australia’s export revenues and this can further be boosted by $15 billion with strength coming in from the iron ore price.
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