Iron ore’s long goodbye is extended – again

Iron ore’s long goodbye kicks on and might last for the rest of the year thanks to Russia’s war on the Ukraine and another setback for a project in Africa dubbed the Pilbara Killer.

Fighting in the Ukraine has effectively removed 100 million tonnes of iron ore from the market with commercial shipping in the Black Sea at a standstill and driving up prices for the region’s major exports that include barley, sunflower oil, and iron products which include ore, pellets, and pig iron.

Another 100 million tonnes a year of iron ore also looks like being delayed as fresh doubts emerge around the long promised but slow to arrive Simandou mine in Guinea.

High iron ore price lifts miners

The net result is that the price of high-grade iron ore continues to trade at more than US$140 a tonne – ensuring that every Australian miner of the steel making material is operating profitably, some outrageously so.

The high price and the promise of more to come, even as a war-caused global recession threatens, is why the share prices of iron ore stocks have held up despite frequent forecasts of a fall.

Fortescue Metals (ASX: FMG) the biggest of the pure play iron ore producers continues to trade around $17.40 – even with heavyweight investment banks downgrading the stock to sell and with price forecasts as low as $13 (Morgan Stanley) and $14 (Credit Suisse).

Part of the negative view of Fortescue relates to its push into renewable energy, which is proving hard to value.

Smaller miners have also responded to the stronger-than-expected iron ore price which is up 56% from US$92 a tonne in November to latest sales at US$144/t.

Champion Iron (ASX: CIA) has risen by 18% over the past six months to $6.35.

Grange Resources (ASX: GRR) is up 75% at $0.95 and Akora Resources (ASX: AKO) is up 63% at $0.36. GWR Group (ASX: GWR) is steady at $0.15 and Fenix (ASX: FEX) is down 25% over the last six months, but up $0.01 at $0.24 over the past two weeks and Genmin (ASX: GEN) is up 41% to $0.19.

Price contraction on the cards?

All stocks exposed to iron ore are benefiting from the prolonged buoyant conditions, a surprise as there have been repeated forecasts over the past two years of a price contraction back to US$80/t, and lower.

How long this latest extension, of what has effectively been a 20-year boom, can continue is a question which will dominate the world’s top iron ore conference being held in Perth at the end of the month.

The Global Iron Ore & Steel Forecast Conference was a big event in the iron ore industry for two decades, before Covid and WA’s own version of an “iron curtain” kept visitors out and the locals locked in.

Normality has started to return in a state, which is the world’s biggest producer of iron ore and a key to Australia’s trade relationship with China, which is why the most important speaker at the two-day event will be Li Xinchuang, the man from the China Iron & Steel Association (CISA).

CISA is an organisation known for its militant leaders which have repeatedly called for an end to the iron ore duopoly of Australia and Brazil that has been able to extract high iron ore prices from Chinese steel mills.

Unfortunately for CISA its calls for a new pricing mechanism have always fallen flat thanks to repeated supply shocks, ranging from floods in Brazil to cyclones off the WA coast, followed by the worldwide Covid slowdown.

Developing Simandou

Simandou was seen by CISA as the project to break the stranglehold of Australian and Brazilian iron ore producers, but it’s proving to be much harder to develop than might reasonably have been expected.

Difficult geography means that iron ore mines deep inside Guinea require long railways through harsh country, though the biggest obstacle in the country has been government corruption which has led to painful corporate problems at two of the world’s biggest iron ore miners, Rio Tinto (ASX: RIO), and Brazil’s Vale.

The latest news about Simandou points to a Guinean Government corruption encore, with the latest of an endless cycle of military coups forcing a change at the top last September, followed by an order for Rio Tinto to stop work on its portion of the Simandou orebody.

According to media reports from Guinea a new country boss, Colonel Doumbouya (why is it always a colonel who heads a coup in Africa?) called a halt on the project pending “clarification of the operational mode by which the interests of Guinea will be preserved.”

That comment, like much of what’s been said in the past, is open to interpretation, but the importance from an investment perspective is that Simandou looks like being delayed again as Guinea lives up its embarrassing reputation as the most corrupt country in Africa, which is quite an achievement given the high level of competition.

Iron ore price predictions

With Ukrainian iron ore stuck in the Black Sea, and Russian iron ore effectively blackballed – the price of the mineral appears likely to stay higher for longer, with the latest setback in Guinea adding to a long-running supply squeeze which deeply annoys China’s steel mills.

Investment banks, which have been forecasting an iron ore fall, continue to push that argument though they no longer see a sudden fall.

Macquarie Bank last week upgraded its outlook for the commodity and the share prices of Australian iron ore miners with a supply squeeze likely to bump into a burst of fresh Chinese infrastructure spending to offset an economic slowdown, which is behind a 5.5% annual economic growth forecast – the lowest in 10-years.

From its current level of US$144/t iron ore is tipped to decline to US$130/t in the September quarter but still be trading at US$120/t by the end of the year.

Citi, another bank, sees an average iron ore price this year of US$136/t before declining to US$80/t – though that lower price has been a feature of most forecasts for the past few years and has never actually been reached thanks to repeated supply shocks.

If history is a guide, iron ore could stay higher for a lot longer than experts expect, especially if Ukrainian exports remain blocked, either through war damage or because the country slips behind Russia’s iron curtain.

Meanwhile, the Pilbara Killing Simandou project remains tied up in Guinea’s corruption ridden government.

A lot happens in iron ore, but not a lot changes.