Put not your faith in forecasts as the only way of looking at future price movements – if anything the surge in iron ore (and coal) prices in the closing half of 2016 should have rammed home the inadequacy of price forecasts to investors and others as an accurate guide.
While the ’trend can be your friend’, it can also mislead and destroy credibility very quickly as all forecasters from investment banks, commodity companies, governments and consultancies found to their cost last year.
In fact iron ore prices were up 82% over 2016 while every forecast was for a continuation of the weakness seen in late 2015 and the first quarter of 2016.
So the 9th day of 2017 yesterday saw an outbreak of the now familiar jitters in the share prices of iron ore miners (BHP, Rio and Fortescue) on the ASX in the wake of publicity from the latest price estimates for this year and next from the Federal Department of Industry, Innovation and Science which issues four iron ore price forecasts (with supporting arguments) a year.
This year the Department sees this year’s iron ore price at $US51.60 a tonne and (for the first time) $US46.70 a tonne in 2018. The department said iron ore rose in 2016 thanks to Chinese demand for steel for residential construction and speculative trading in the country.
That was also something of an understatement given that the department’s forecasts last year bore little or no resemblance to what happened to iron ore prices in 2016, as the 80% plus price surge confirms. After falling to multi-year lows in late 2015 (around $US37 a tonne) and early last year they surged past $US82 a tonne and finished in the range of $US76 to $US80 a tonne at the end of December.
In fact the department cut its forecasts for most of last year, even as the world prices rose sharply thanks to higher demand from Chinese steel mills and speculators (who were responding to the more than 8 to 10 rises in Chinese steel prices over the year).
In fact in December 2015, Reuters reported that “Australia cut its 2016 iron ore price forecast to $US40.40 a tonne from $US50 previously, citing rising supplies as global steel production contracts. “Increasing supply from Australia and Brazil is forecast to drive seaborne iron ore spot prices down in 2015 and 2016,” Australia’s Department of Industry, Innovation and Science said.
Then in July of last year the department again cut its forecast 2017 price by 20% to $US44.80 a tonne. That compares with its previous forecast of $US56 given in the March quarter. The prediction for 2016 was little changed at $US44.20 a ton from $US45.
And in October, Bloomberg reported that the Department of Industry, Innovation and Science, the country boosted the iron ore price outlook this year by 10% to $US48.50 a tonne from $US44.20 a tonne.
And a final point, those reports on the latest forecast failed to point out that the first estimate for 2017 was higher than any forecast in 2016 – a sign the department remains wary about the immediate movement in prices, as should all investors.
The best advice is to keep a close watch on Chinese real estate investment and sales data, steel price moves, and then the various Chinese commodity exchanges which are heavily influenced by speculators.
