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IRON ORE REVIEW Iron ore processing facility at Fortescue Metal Group's Christmas Creek mine in Western Australia. (Photo courtesy of Fortescue Metals Group) In general, in any given year not all Certain-category projects will reach pro- duction and not all Probable projects will become operational within the period stat- ed by the project owner or operator, but the delay rarely exceeds three years. Most of the Possible-category projects will not meet their original target date but many will eventually go onstream. In spite of these uncertainties, it can reasonably be assumed that around 510 million mt, with a low range of 380 million mt and a high of 600 million mt, of new capacity will come onstream in the period up to and including 2014. In the three-year period after 2014, some 348 million mt of additional iron ore capacity is listed with a completion date. Given the present circumstances of higher uncertainty in combination with increased difficulty in obtaining funding for mining projects, we will probably see some start dates being pushed out, but because the long-term market situation looks good quite a few of these projects will probably go forward. However, the rate of new addi- tions to the project pipeline may decrease. Modest Growth in Production, Demand and Prices The world economic outlook remains uncer- tain and appears considerably less positive than at this time last year. Compared with last year, the IMF has revised its forecasts downwards and its forecast for world eco- nomic growth in 2012 is 3.3%, and 3.9% for 2013. Developed economies show little dynamism, with developments in the Euro 46 E&MJ; • NOVEMBER 2012 zone posing downward risks for the world economy as a whole. The World Steel Association's short-term forecast for world steel use, presented in April 2012, antici- pates a rise in steel use by 3.6% in 2012, followed by an increase of 4.5% in 2013. The association thus expects global steel demand to continue growing at relatively high rates from a historical perspective, albeit slower than in the years preceding the financial crisis. In particular, China's growth is expected to slow considerably from earlier very high rates. On the basis of the prospects for a return to stronger growth in the second half of this year, we expect world crude steel production in 2012 to be about 1,530 mil- lion mt, or about 4% higher than in 2011. Beyond 2012, we would expect steel use and production to increase at an annual rate of just below 4%. When this report was written in mid- 2012, the iron ore market was still rela- tively tight and although spot prices had declined in recent months they remained high from a historical perspective, sup- ported by Chinese demand. Chinese steel production continued to grow, at a reduced pace, and its domestic produc- tion cannot meet the additional demand. Chinese iron ore production, which in the past has been characterized by its flexibil- ity, with output expanding quickly in response to price increases, appears to be encountering constraints. There are a large number of projects in the investment pipeline. However, supply chains are already strained, with delivery times lengthening for all types of equip- ment. Moreover, with new regulations requiring banks to increase their capital ratios and to avoid risks, several of the smaller projects are facing financing prob- lems. Thus, it is quite likely that new capacity will take longer to enter produc- tion than anticipated. We are not prepared to conclude that the iron ore market is facing imminent reversal. First, there is reason to believe that recent expansion plans are somewhat optimistic. Second, figures for capacity additions refer to what is added at the end of the year, and a part of it will not be in operation until late in the year. Third, and most important, the market will be tight due to two mechanisms placing a cushion under prices: 1) the large iron ore produc- ers can implement their expansion plans with a great deal of flexibility; and 2) a siz- able segment of the Chinese iron ore min- ing industry would shut down if prices were to fall dramatically below present levels. Accordingly, we believe that while the market is certainly moving toward a bal- anced supply and demand situation, it will remain tight—with a strong possibility of modest price increases during the second half of 2012—and the next few years will be characterized by gradual adaptation of supply, by way of addition of new capacity, to a continuously growing demand. We estimate that iron ore use will increase from 1,922 million mt in 2011 to about 2,000 million mt in 2011 and 2,080 million mt in 2013. Prices, while declining slowly from 2013 onward, will remain at levels that must be considered high from a historical perspective, with a floor at around $100–$120/ton delivered in China. Magnus Ericsson is senior partner of RMG and acting CEO as well as a co-founder of the company. Anton Löf is senior iron ore analyst and head of the consulting depart- ment at RMG. Olle Östensson is an inde- pendent consultant, specializing in analy- sis of commodity markets and governance of the mining and metals industries. The background material for this article was extracted from The Iron Ore Market 2011- 2013, published by UNCTAD in July 2012. That study was researched and compiled by Raw Materials Group (www.rmg.se), and can be ordered from: ironore@unctad.org or by fax (contact Amelie Zethelius Mermet, fax +41-22 9170509). www.e-mj.com