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Are surging commodity prices a sign of a new supercycle? MARKETS
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Transporting iron ore by train in Western Australia. BHP
Iron ore prices hit new record OUTLOOK
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| Producers are seeing exceptionally high margins
BY HENRY LAZENBY
he price for iron ore surged to a record US$237.57 per tonne on May 11 as strong Chinese demand continued to outpace supply. The record price levels are supported by a continued supply squeeze, with major iron ore producers reporting seasonally lower output in the March quarter, and growing concern over the escalating Covid-19 crisis in India, which could impact the country’s exports of the metal. “These factors, along with a recovery in ex-China demand, is expected to drive the global seaborne trade balance into a deeper deficit in 2021, with annual prices forecast to average US$153 per tonne,” Ronnie Cecil, principal analyst for metals and mining research at S&P Global Market Intelligence, tells The Northern Miner, although he notes a seasonal rise in Brazilian exports are likely to lower prices in the second half of the year. CRU Group principal analyst Erik Hedborg attributes the record price run in part to recent production cuts in the city of Tangshan in China’s northeastern Hebei province, which he says have boosted demand for higher quality ore. It has also prompted mills to build iron ore inventories as their margins are on the rise. “Iron ore producers are enjoying exceptionally high margins as well; around two-thirds of seaborne supply only require prices of US$50 per dry metric tonne to break even,” Hedborg states in a May 6 research note to clients.
So bullish is Raymond James analyst Brian MacArthur that he has increased the brokerage’s 2021 calendar price for premium iron ore with an iron content of 65% and higher to US$148 per tonne from US$138 per tonne previously. “Premium iron ore prices remain
strong and averaged about US$210 per tonne in April. In our view, the recent prices reflect ongoing strong demand supported by commitments to reduce emissions from steelmaking,” MacArthur commented in a See OUTLOOK / 7
| Some analysts say ‘not so fast’
BY HENRY LAZENBY
conomists are tracking a broad economic recovery across the globe that appears to be gathering momentum and commodity prices are trading at healthy-tostratospheric levels amid recovering demand from the Covid-19 pandemic, escalating geopolitical tension between the world’s industrial juggernaut China and key mining nations like Australia, and circumstantial supply-side issues. On May 11 iron ore prices surged to a record US$237.57 per tonne and copper broke out of a decade-long rut on May 7, as metal for delivery in July gained 3.2%, with futures trading at a record US$4.75 per lb. (US$10,470 per tonne) on the Comex market in New York, compared with the 2011 record of US$4.50 lb. (US$10,190 tonne). Unprecedented infrastructurefocused stimulus packages add a new layer of incremental demand growth to already generally bullish commodity fundamentals, and in recent quarterly conference calls the world’s mining majors boasted of record revenues, cash flow and returns to shareholders. Surging prices are leading some to believe that the market is entering a new commodity supercycle — when prices climb for years if not decades. The analogue is the largely Chinese-driven supercycle of 20022008, when the country pushed industrialization and urbanization, and its gross domestic product expanded annually at a percentage rate in the low to mid-teens. But most analysts The Northern Miner interviewed are not so sure we are there just yet, with some arguing a real supercycle is only likely to emerge in about three to five years from now as the transition to the green economy firmly takes hold. Julian Kettle, Wood Mackenzie’s senior vice president and vice-chair for metals and mining, is one of them. “Not so fast,” he says, noting that while specific commodity markets are trading above fundamentals, the fundamentals themselves don’t yet justify current prices. “We see it for a range of the commodities because you’ve had so much momentum,” he says in a telephone interview. “You always get a strong recovery following a recession. But the key question is, do we think that can be sustained going forward in terms of GDP
CIM 2021: MARK CUTIFANI ON CREATING THE FUTURE / 6
growth? And the answer is no.” “Historically, post-recovery growth is not sustained, ever. The second thing is that much of that growth we’re seeing is based on debt, which has to be repaid. Also, we’re already seeing inflation coming back into the system. And whilst central banks will allow some inflation, if commodity prices have doubled, it won’t allow that inflation to take hold. Central banks will raise rates, which subdues growth. But give it about three to five years and the energy transition will really start to take hold. Some commodities will certainly be in supercycle territory — others will be in super-slump territory.” Aurelia Britsch, head of commodities at Fitch Solutions, broadly agrees, saying commodity demand has generally just caught up with last year’s Covid-19 shocks. “Although supply and demand drivers will be positive for certain commodities such as copper, nickel and iron ore in the near term, over the coming years, an expected slowdown in Chinese growth, combined See MARKETS / 6
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