Australia raises iron ore price forecast

Iron ore was drifting lower on Friday with the Northern China benchmark import price at $53.30 per dry metric tonne (62% Fe CFR Tianjin port) according to data supplied by The Steel Index.

Iron ore is 1.3% down for the week and well below the year high following an insane 19.5% one-day rally in early March, but the commodity remains in firmly in a bull market for 2016 with a 24% rise year to date and a 44% surge from near-decade lows reached mid-December.

Iron ore's strong showing have caught many by surprise.

The rebound goes against most predictions – Goldman Sachs expects price to average $38 this year (Q1 average is $48). Producers themselves are also pessimistic – BHP's Andrew Mackenzie last month told the industry to "prepare for lower-for-longer".

But at least one entity has been connvinced that the steelmaking ingredient's rally may linger. Australia’s Department of Industry, Innovation & Science on Friday, following a string of forecast cuts, finally had the chance to make a positive adjustment.

New low cost capacity being developed, particularly in Australia and Brazil, should limit any price increase

The government forecaster in its latest quarterly report adjusted upwards its iron ore price forecast by 9% and now expects prices to average $45 a tonne this year compared to the $41.30 per tonne prediction it made in December (which itself was downward adjustment from the $51.20 the body predicted in September).

Prices will continue to improve to average $56 next year  rising to above $60 in 2018. Five years out iron ore will be trading at $64.70, the department estimates. The prices used by the department are free-on-board Australia. Freight rates have hit rock bottom and the West Australia–China route adds only around $5 a tonne to the price, while from Brazil shipping costs are below $10 a tonne.

Australia raises iron ore price forecastThe department names the exit of of high-cost producers — mostly outside of Australia — as an important factor supporting higher prices but warns loss-making producers may cling on for longer than anticipated:

A sustained period of lower prices over the projection period is expected to result in the closure of high-cost capacity as the financial losses of these companies begin to accumulate.

Although these closures will provide some support to prices, new low cost capacity being developed, particularly in Australia and Brazil, should limit any price increase. If high cost capacity takes longer to be closed than anticipated, or if costs at new or existing mines can be reduced further, prices may stay lower for longer.

Australia and Brazil are predicted to increase their share of the seaborne market to 90% within five years

Australia, and to a lesser degree Brazil, is wiping the floor with producers in other countries. The two nations are predicted to increase their share of the seaborne market to 90% within five years from 77% at the moment.

Australia Industry estimates global trade in iron ore to inch up by only 4 million tonnes from 2015 levels to reach 1.48 billion tonnes in 2016, the lowest rate of growth in more than a decade. By 2021 world trade in iron ore is forecast to jump to just under 1.6 billion tonnes.

Iron ore dependence on China won't diminish even as imports begin to fall from record levels next year according to the report. China last year consumed two-thirds of the seaborne iron ore supply with imports reaching a record 968 million tonnes according to dept calculations.

Customs data shows year-to-date Chinese imports continuing to grow and the dept predicts imports into the world's second larges economy will top 1 billion tonnes for the first time this year and then stay essentially flat for the rest of the decade at 1.02 billion tonnes in 2021.