Five iron ore trends to watch in 2020 - report

Vale's massive S11D iron ore mine in Par??, Brazil. Photo by Jos?(C) Rodrigo Zermiani, Vale.

Metals and mining research and consultancy group Wood Mackenzie has identified five trends that will impact the iron ore industry in 2020.

Slower demand growth, especially in China, and a decent recovery in seaborne supply will continue to feature prominently in the iron ore industry in 2020, Wood Mackenzie said in a research note. Prices are predicted to fall, with annual average price forecast for 2020 at $80/ tonne.

Vale - starting to give back some of what it tookaway in 2019

In 2020, Vale could once again be the biggestswing factor for iron ore, but this time in the opposite direction.

"Wood Mackenzie forecasts an accelerated recovery in shipments from Q1-20, resulting in a 30 million tonnes (Mt) rise in seaborne exports from Vale in CY 2020. In other words, half of last year's losses will be recovered in just one year," Research Director Paul Gray said in the media release.

Looking further ahead, Vale's previous peak production (385 Mt in 2018) could be achieved as soon as 2021, pending extreme weather conditions and consequential supply chain disruptions. This is to the credit of the rapid repair and recovery program underway at the company's key hubs in Minas Gerais.

Chinese iron ore production - how sustainable asprices fall?

Chinese iron ore production increased byapproximately 30 Mt in 2019 in response to strong domestic demand and tightseaborne supply. In 2020, Wood Mackenzie forecasts a decent recovery inseaborne supply.

Chinese concentrate production will remainbroadly stable in 2020 with no significant displacement occurring until 2021,Wood Mackenzie predicts.

"There is more upside than downside risk to ourChinese iron ore production forecast for 2020. In H2-19 we saw how resilientChinese domestic production (and price) has become due to falling seaborneprices. This trend will likely persist through 2020 as further productivity andefficiency gains are realized," Senior manager Ming He said.

"The trend towards higher pellet rates in theblast furnace burden and installation of more efficient pelletising capacitywithin China should also support demand for domestic concentrate used as pelletfeed," He added.

The downside risk to production from increasinglystringent safety and environmental protection policies has also diminished nowthat mine operators have upgraded equipment and improved the technicalefficiency of beneficiation.

An Indian supply-side surprise?

Indian imports could rise to 12 Mt in 2020. Toreduce reliance on expensive imports, either exports need to fall by a further10 Mt or domestic production needs to rise by the equivalent tonnage.

"Akey point to watch in 2020 is India's ability and willingness to boost domesticproduction in response to stronger demand and wide spreads between domestic andseaborne pricing. Look out for higher supply from NMDC (additional 3 Mtcapacity at Kumaraswamy mines), an additional 3-4 Mt from JSW, plus SAIL'senhanced ability to fill any shortages now that the government-owned produceris permitted to sell 25% of production in the open market," Principal analystSandeep Kalia said.

The mine lease auction process for 18 workingmines (with capacity to produce approximately 80 million tonnes per year(Mtpy)) is scheduled for completion by end-February. The results of which willprovide a good indication of potential production shortfalls.

Premiums and penalties - where next?

The past two years have been a roller-coasterride for iron ore grade price spreads and impurity penalties - notably silicaand alumina differentials.

"In2020 we forecast a modest recovery in the 65/62 spread (spread between the 65% Fe index and the 62% Fe index),from an annual average of 12% in 2019 to 14% in 2020. However, with steelprices likely to remain under pressure and iron ore prices currently tradingabove our forecast, there is risk of further steel margin compression, limitingthe scope for higher premiums for high grade ore," Gray said.

"We are also firm believers in the long run trendtowards steel mills consuming more high-grade ore at the expense of low-gradeore, but this can come at a cost of rising alumina in blast furnace slag - toomuch alumina increases slag viscosity, significantly reducing blast furnacepermeability which negatively impacts fuel rate and overallproductivity. Watch out for rising alumina penalties and falling silicapenalties," Gray added.

Will Simandou take off?

Simandou's new owners, the Chinese-backedconsortium SMB-Winning, announced last year that the mine has capacity toproduce over 100 Mtpy of high-grade iron ore, and is expected to commenceproduction in 2025.

"Aproject of this scale in this location (Guinea) will almost certainly take morethan five years to reach fruition. But more importantly, we thinkthe market will struggle to absorb the additional supply, and it will be achallenge to earn sufficient return on investment," Gray said.

"However, key consortium partner China Hongqiao (Weiqiao) Group has significant influence and investments in Guinea. Ultimately, this could come down to a strategic desire for China to reduce reliance on imported iron ore from Australia and Brazil while increasing captive ownership of iron ore resources in a country where China already has considerable influence," Gray added.