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This is part 2 of our question and answer session with CRU & Wood Mackenzie. To read part 1 please click here.
The iron ore price continues to drop with many companies stripping costs in a bid to weather the storm. In the lead up to Perth’s premier iron ore event, the Global Iron Ore & Steel Forecast next month, we had the opportunity to speak with CRU and Wood Mackenzie about what they thought the falling price meant for consolidation in the industry.
Wood Mackenzie’s Andrew Hodge:
Yes, we forecast a more concentrated industry structure over the medium/long term. So far few buyers have emerged for distressed assets so we may just see rationalisation without consolidation but that will lead to greater concentration assuming the closures are permanent.
How will the iron ore industry change and develop from the current surplus market?
Excess supply capability will remain a feature of the market for at least the next 3 years, based on expansions by the majors that will continue almost regardless of price! Post 2020 supply/demand should be more closely aligned with a tendency towards “notional shortage” and a need to develop mines/expansions not currently included in our base case. But the timing of this transition all depends on China! Specifically the growth rate for Chinese hot metal production. We assume medium term (5yr) growth rate of approx. 2% pa – if its lower than that then the “surplus” or excess supply capability will persist for longer!
The price is falling because the industry is consolidating as the majors’ low cost production is expanding. For now, there are rare cases of companies trying to merge to find synergies, for example London Mining and African Minerals. Further M&A activity and opportunities for JVs are likely for next year, as we have seen in the metallurgical coal sector.