Iron Ore December 2016
Following price improvement in October...

The iron ore spot price (CFR China, 62% Fe fines) lifted 24% in November to average US$73/t. Prices peaked at US$80/t near the end of the month, a level that was last reached in October 2014. During the last few days of November, the price retracted around US$3/t. AME retains its iron ore spot price forecast of US$55/t for 2016 and 2017. In the medium term, AME forecasts an iron ore spot price of US$50/t for 2018 and 2019 driven by the ramp-up profile of committed low-cost supply from major projects.

Following price improvement in October, the iron ore price continued upwards in November despite rising Chinese port stockpiles. The surge in coking coal prices increased demand for medium- and high-grade iron ore products, supporting iron ore prices throughout November. 

  • Lower grade and higher silica ferrous feed in the blast furnace can increase the coke rate, leading to increased coking coal consumption. Consequently, the price spread between 62% Fe and 58% Fe iron ore products widened as Chinese steelmakers looked to offset higher coke costs with higher productivity. Stronger demand for higher-value in use products continues to cause a greater spread between 62% Fe and 65% Fe iron ore products, as well as supporting higher Asian blast furnace pellet premiums. Futures activity contributed to price volatility and authorities took further steps to control speculation.

According to the National Bureau of Statistics of China, Chinese crude steel production lifted 4% year on year in October. Cumulative production year on year, between January to October, was up 0.7%, extending its cumulative gain for the year since September, compared to a cumulative decline of 5.7% in the first two months of 2016. Chinese iron ore port stockpiles were around 111Mt in late November, 2.8% higher than late October. In September, Chinese port stockpiles were approximately 4.9 weeks’ worth of demand, compared to 4.7 weeks in October.

Several producers gave end-of-year updates on their strategies for future supply.
  • Rio Tinto clearly signalled that its strategy going forward was a focus on value over volume. The company confirmed 2017 guidance of 330–340Mt. However, to achieve full system capacity, which is constrained by existing port capacity of 360Mtpa, will require completion of the Autohaul rail system, commissioning of Silvergrass and productivity improvements. Autohaul is expected to be fully implemented by the end of 2018. Commissioning of Silvergrass is expected in the second half of 2017. Total system capacity could be achieved by 2019. West Angelas F and Yandicoogina Oxbow were identified as the next brownfield developments to maintain capacity. The 40Mtpa Koodaideri project is the next greenfield option for maintaining capacity. Capex would be US$2.2bn, commencing in 2019, with first ore available by 2021.
  • Vale had previously announced a volume over value strategy and provided new guidance. Compared to December 2015 guidance, forecast annual production ranges from Brazilian operations are reduced by 20Mtpa for each year between 2017 and 2020, reaching 400–450Mtpa by 2020. 230Mtpa of the 2020 total is from the Northern System (Carajás). The forecast ramp-up rate of commissioning Carajás S11D to reach Northern System capacity of 230Mtpa is slowed by one year so that full capacity is reached in 2020. Vale also announced a redesign of its production and logistics strategies to reduce complexity. Going forward, it will reduce the number of saleable products from each mine site. These will be replaced by intermediate products, which will blended into final saleable products at Chinese ports and distribution centres closer to customers.
  • Atlas Iron confirmed that Abydos and Wodgina will deplete reserves in 2017, leaving a 9Mtpa gap in the miner's current 15Mtpa production rate. To reduce the gap, Atlas plans to ramp up production at Mt Webber to 7.8Mtpa by the end of 2017. Atlas will also make a development decision on the US$29–37m 4Mtpa Corunna Downs project during the March Quarter of 2017. Atlas is targeting production by the March Quarter of 2018. If Corunna Downs comes on line by 2019, compared to current production levels, AME estimates the miner will still be facing a production deficit of upwards of 20%. Longer term, Atlas plans to produce a DFS for the 4–8Mtpa McPhee Creek Project during 2019.

Fortescue Metals Group gained approval for replacement capacity but has not flagged expansion plans.

  • The Environmental Protection Agency (EPA) of Western Australia recommended approval of Fortescue Metals Groups (FMG) application for its Solomon mine expansion. The application includes additional mining areas at Castle Valley and Frederick, supporting rail infrastructure, external bore fields and tailings storage. The proposal, submitted by FMG in December 2015, would increase the mine life by 35 years from 2016. FMG maintains that the expansion does not indicate intent to push Solomon Hub beyond its current 70Mtpa capacity currently mined from Firetail and Kings Mines.