Australia sees iron ore prices only getting worse

Lost jobs in Australia’s coal sector becoming a hard-to-heal wound.

The outlook for iron ore, Australia’s main commodities export, is looking worse than analysts have predicted so far, with prices expected to fall to $90 a tonne over the next five years as demand for the steel-making ingredient wanes and a wave of new supply hits the market.

According to the latest report from the Bureau of Resource and Energy Economics, Australia’s official commodities forecasting agency, the Government should expect to lose around $17billion from expected iron ore export revenue out to 2016-17, slashing it to about $70 billion from a forecast of $88billion made a year ago.

The gloomy outlook, which is based on twin negatives of growing supply and falling demand, plus downgrades global commodities trader Goldman Sachs, led the share market to a five-month low, while in London Rio Tinto shares had their sharpest fall in 18 months.

Analysts are increasingly worried that the seaborne iron ore market will soon be in oversupply as output increases from Australia – the world’s top exporter of the commodity – and demand from China slows.

Iron ore prices hit a two-and-half month low of $132.90 a tonne last week, as Chinese steelmakers, the largest source of demand globally, backed away from the market amid signs of weakness in end demand.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts

And earlier this week, Goldman Sachs lowered its 2015 forecast to $80 a tonne.

“Continued investment in large-scale (Chinese) mines is likely to offset the loss of marginal mines and moderate future demand for imports,” Goldman said.

“Unlike the small, privately owned mines (which are sensitive to moves in spot prices), vertically integrated iron ore production from large-scale mines (gives) a transportation cost advantage and provides security of supply,” the report added.

The steel-making material is key for the profitability of the world’s largest miners, such as BHP Billiton, Fortescue Metals Group, Vale and Rio Tinto, as well as steelmakers including ArcelorMittal and Baosteel.

The commodity is, in fact, expected to account for more than half BHP’s earnings this year and over 75% of Rio’s profits.

Relations between China and the iron ore miners have been strained for a long time as the market fundamentals have shifted in favour of producers. In early March, Beijing’s National Development and Reform Commission accused mining firms and traders of manipulating iron ore prices higher.