International credit ratings agency Moody's has announced that it has lowered its price forecasts for iron ore and metallurgical coal in response to slowing steel production in China and rampant oversupply, particularly of iron ore, which will keep prices low through at least next year. Moody's price forecast for iron ore now stands at $40/mt for both 2015 and 2016, while its price forecast for metallurgical coal stands at $100/mt in 2015 and $110/mt in 2016.
"Companies' earnings will be materially affected by the lower prices for metallurgical coal and iron ore. Slower global economic expansion, particularly in China, which accounts for approximately 50 percent of global steel production, will continue to limit growth in steel demand, while at the same time iron ore and metallurgical coal, two key raw material inputs, are in oversupply," the Moody's report noted.
Production of iron ore continues to increase particularly in Australia and Brazil, with the reasons for this including a desire to maintain market share and expectations that high-cost producers will be forced to exit the market, while the lower costs associated with higher volumes help mitigate price declines.
According to Moody's, while some capacity has come out of the iron ore market, the shutdowns pale in comparison to the expected new supply. Metallurgical coal likewise remains in oversupply and US metallurgical coal producers' announced cuts are taking longer than expected to be implemented.