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Stock Strategist Industry Reports

Rise of the Scrap Age

We're cutting our iron ore and met coal price forecasts as the long-term demand outlook weakens.

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Beaten-down iron ore and metallurgical coal prices have prompted investors to wonder whether we've finally reached a bottom. The recent recovery in iron ore to $50 per tonne from $40 in December might suggest as much. Consensus, while damped from years past, also sees better days ahead. The average sell-side forecast tracked by Metal Bulletin has iron ore ascending to over $60 in five years. This optimism is predicated on the notion that loss-making mines globally and within China will close, pushing prices higher. The story is similar for metallurgical coal.

While conditions ought to improve on the supply side, we are increasingly concerned about the demand side, especially in China. Our updated outlook for Chinese steel demand and steel scrap availability suggests the market hasn't yet seen the worst for iron ore and metallurgical coal. Based on a sector-by-sector steel use forecast, we now expect Chinese steel demand to fall to 648 million tonnes by 2025 from the peak of 765 million tonnes in 2013. Our previous forecast was for a shallower decline. Meanwhile, as China's steel stock in use reaches its end of life over the coming decade, we expect domestic scrap availability to rise 10% annually. Electric arc furnace production should grow too, to 11% of steel production by 2025 from 6% in 2015.

David Wang, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.