You know the outlook for a commodity is bleak when even a record low consensus forecast for prices looks overly optimistic.
This appears to be the case for iron ore, where a Reuters poll of analysts published on Wednesday showed a median estimate of $68 a tonne for spot Asian prices in 2015.
If the median forecast proves accurate, it would be well below the 2014 average of $97 a tonne, and lower than the previous record low year average of $86 in 2009.
The problem with the forecast of $68 a tonne average for this year is the current spot price of the steel-making ingredient is already 7.8 percent lower, closing on Wednesday at a fresh six-year low of $62.70.
This means that for the median estimate of the 13 analysts polled to be realised, the spot price will have to rise over the rest of the year, and presumably spend some time above $68 a tonne in order to make up for the current period of weakness.
What is a known fact is that over the rest of 2015, supply is going to increase as the big three global miners, Brazil’s Vale and the Anglo-Australian pair of Rio Tinto (Xetra: 855018 – news) and BHP Billiton (NYSE: BBL – news) , raise output.
In addition, other new supply is expected to come from Australian billionaire Gina Rinehart’s Roy Hill mine and as Anglo American (LSE: AAL.L – news) ‘s Minas Rio project in Brazil ramps up.
Overall, seaborne supply is likely to grow by at least 100 million tonnes this year, and possibly more.
The big miners have bet that their low-cost ore will force higher-cost and smaller producers from the market, but whether enough output will be shut down to compensate for the increased supply remains doubtful.
That means if prices are going to rise from their current level and average $68 for the year, the demand side will have to rise to the occasion, again something that looks doubtful.
The outlook for top importer China, which brought in 932.7 million tonnes of iron ore last year, is somewhat uncertain.
The expectation is that steel output won’t grow by much, if at all, in 2015, following the anaemic 0.9-percent rise last year to 822.7 million tonnes.
Chinese apparent steel demand actually fell 3.4 percent last year, according to the China Iron & Steel Association (CISA), with rising exports helping absorb some of the output.
However, the closing of an export tax rebate loophole on steel exports containing tiny amounts of boron may result in lower steel exports this year, which in turn would boost the surplus of steel available domestically.
MORE CHINA MINES TO SHUT?
It appears that the only way for China to increase iron ore imports in the face of stagnant steel production will be for more domestic mines to close or curtail output.
While as much as 100 million tonnes of iron ore output, on a 62 percent iron content basis, may have already been idled in the domestic market, this would have to repeated again in 2015 to offset the increase in supplies from Australia and Brazil.
While this is possible, given that many of the Chinese mines are owned by the state-controlled steel companies, it’s more likely that shutting down domestic mines in favour of imported ore will be a last resort.
Overall, the outlook is for seaborne iron ore supply to rise strongly in 2015, while demand at best may be slightly higher.
The fact that the big three can withstand lower prices and still make profits also suggests that iron ore has further to fall in order to force more higher-cost supply to be idled.
This doesn’t support the view that iron ore prices can even average $68 a tonne, and the risk to the consensus must be to the downside.