How high will the iron ore price go?

As the iron ore price shot past US$100 per tonne on Friday, analysts are forecasting various scenarios for the commodity including a hike to US$110/t – propelled by a cut in supply from Vale’s Brazilian operations, record low inventory in China and ongoing growth in steel production.

The commodity ended Friday at US$103/t – rocketing more than 44% since the start of the year.

However, Trading Economics expects the current highs won’t be sustained with the price tipped to hover at US$93.69/t by the end of the quarter and US$88.44/t in 12 months’ time.

Meanwhile, UBS lifted its forecast for the commodity for the second time this year – estimating an average price of US$83/t.

Taking a more bullish slant is Liberum Capital, which anticipates the iron ore price could exceed US$110/t in the second half of the year.

Back in February, Commonwealth Bank commodities analyst Vivek Dhar told media outlets he believed the price would push past US$100/t shortly as a result of Vale’s second disastrous tailings dam collapse and continued growth in steel production.

His prediction was realised on Friday.

Although reaching highs not seen in years, the iron ore price is a world away from its February 2011 record of more than US$190/t.

Vale’s tailing dam catastrophe

Propelling the recent upward momentum was the cessation of production at Vale’s Corrego do Feijao iron ore operation due to a disastrous tailings dam collapse in late January.

The world’s biggest iron ore producer Brazilian-based Vale was ordered to halt operations at the mine after the collapse, which came only four years after its Fundao tailings dam failure – regarded as Brazil’s largest environmental disaster.

After the Corrego do Feijao catastrophe, Vale said it would decommission 10 tailings dams built by the upstream method across the country. As a result, production where the dams are located will also cease while work is underway.

The company estimated it would curb about 40Mt of iron ore from entering global market annually over the next few years while the faulty tailings dams are fixed.

As a result of the curbed output, a senior Brazilian official has been cited as saying national iron ore production would likely plummet by 10% this year.

Spurring the price further, was Vale’s concession over the weekend that it was carrying out an emergency dam drill in Barao de Cocais where it is believed the Sul Superior dam at the Gongo Soco mine represented a collapse risk after movement was detected last Thursday.

Steel production

Iron ore’s largest market is the steel industry and record low inventories combined with rising steel production in China, have driven consumption of the commodity.

The tight supply and high demand situation have underpinned the commodity’s price growth in recent months.

The World Steel Association reported global crude steel production grew 4.6% in 2018 on 2017 levels.

As the largest steel producing nation, China generated 928.3Mt for the year – a 6.6% rise on 2017 levels.

During March this year, China’s crude steel production surged 10% on 2018 levels to 80.3Mt. Then, in April, crude steel production in the country soared further to 85Mt – up 13% on 2018.

For 2019, the association predicts global steel demand will expand 1.3% on 2018 levels to reach 1,735Mt.

Sustaining this growth are Chinese Government stimulus measures, which the World Steel Association anticipates will buffer slowing investment and sluggish manufacturing performance.