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Iron ore bonanza to deliver until 2022 as supply squeeze lingers

Australia’s biggest miners are poised to benefit from better-than-expected iron ore prices for at least the rest of the year as global ratings agency S&P upgrades its forecasts for the key steel-making raw material.

After surging Chinese steel output in 2020 propelled iron ore prices to a 10-year high and delivered bumper returns to shareholders of BHP, Rio Tinto and Fortescue, S&P Global on Friday upgraded its price assumption for the commodity from $US100 a tonne to $US130 a tonne for this year. For 2022, the firm has lifted its forecast from $US80 to $US100.

The ramp-up of industrial activity in China post-COVID-19 is continuing to fuel robust steel demand in China, according to S&P, at the same time as disruptions are affecting rival iron ore suppliers in Brazil.

“We anticipate that the global seaborne supply deficit could deepen further in 2021 while the timing of the resumption of activity at Vale’s disrupted mines remains uncertain and will likely to continue to support prices over the next 12 months at least,” S&P analyst Donald Marleau said in a report.

“In our view, global demand will continue to outstrip supply over the next one to two years.”

The remarkable rise in the price of iron ore, Australia’s most valuable export, has helped support the nation’s finances through the coronavirus pandemic. During 2020, iron ore accounted for $120 billion in export earnings – the first of any Australian export to top the $100 billion mark.

Australia’s Industry Department also expects the primary drivers of high iron ore prices “to hold” throughout 2021. BHP and Rio Tinto were bringing new mines to production in Western Australia’s Pilbara, but that was largely to substitute depleting mines in the region, the department said. Brazilian producer Vale’s plans to expand capacity, meanwhile, were not expected to reach seaborne markets for at least another two years.

“Consequently, overall output growth is not expected to occur at a pace which reduces prices significantly,” the department said.

Analysts at investment bank UBS said China’ steel output, which hit an all-time high of 1.05 billion tonnes last year, remained at “record levels”. Crude steel output for the first two months of 2021 was up 13 per cent year on year, UBS said.

Australia is the world’s largest iron ore producer and biggest shipper of the commodity to China, which accounts for about 70 per cent of global demand.

However, China’s efforts to diversify its supply with several possible new iron ore mines in Africa are gaining pace, with the planned Simandou mine in Guinea looming as the most significant potential new development.

Anglo-Australian miner Rio Tinto, one of the Simandou project partners, is now reviewing infrastructure costs including port connections and more than 600 kilometres of railway to transport the ore.

“Full output is not expected before 2027 or 2028,” the Industry Department said. At full production, Simandou is expected to be able to supply nearly 200 million tonnes of iron ore per year, or around 15-20 per cent of the current output from WA’s Pilbara.
Source: Sydney Morning Herald

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