Iron ore prices set to fall as global markets shift to surplus: UBS
UBS forecasts iron ore prices to fall from current US$100 average to US$90 over the next 12 months. Here's why.
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KEY POINTS
- UBS forecasts iron ore prices to fall from current US$100 average to US$90 over the next 12 months as the market shifts from balance to surplus.
- Guinea's massive Simandou project will add 120 million tons of capacity starting late 2025, representing a fundamental shift in global supply dynamics alongside increased production from Australia and Brazil.
- China's steel demand is expected to decline 1% annually over the next 3-5 years due to contracting property and construction sectors, creating structural headwinds for iron ore demand.
- Price support is expected around US$80-100 level based on the global cost curve, with major miners likely to shift to "value over volume" strategies if prices fall below US$90.
Iron ore prices are headed for a decline over the next 12 months as the global market transitions from balance to surplus, according to UBS.
The steelmaking ingredient, which has averaged around US$100 per ton in recent months, is forecast to fall to US$90 as supply growth outpaces demand.
Supply Surge on the Horizon
The iron ore market is poised for significant supply increases through 2027. Australia and Brazil are expected to boost production by roughly 3% annually in 2026 and 2027, adding approximately 120 million tons of new supply.
Major projects coming online include Fortescue's Iron Bridge facility, which will add 22 million tons annually, and Mineral Resources' Onslow Iron project contributing 35 million tons per year.
The biggest game-changer, however, is Guinea's Simandou project, which will add 120 million tons of capacity and begin exports in late 2025. This massive addition represents a fundamental shift in global supply dynamics, according to UBS analysts
China Demand Concerns Mount
While supply grows, demand faces headwinds. China's steel consumption, which drives global iron ore demand, is expected to decline by 1% annually over the next three to five years. The property and construction sectors are contracting, and ongoing trade tensions are dampening manufacturing activity.
Steel production in China has already shown signs of moderation in May and June, with utilisation rates declining despite strong export levels of around 120 million tons in May (on an annualised basis).
Market Signals Point to Softening
Several key indicators suggest the market is already cooling:
Iron ore inventories at Chinese ports and mills are rising to elevated levels
Seaborne shipments from traditional suppliers are recovering after earlier disruptions
Steel trader inventories remain low, but port stockpiles are building
Speculative positioning on China's Dalian exchange has turned negative
Source: UBS
Price Outlook and Cost Support
UBS analysts expect iron ore prices to find support around the US$80-100 level, representing the 90th percentile of the global cost curve. At these levels, some Chinese domestic production, Indian mines, and smaller Australian and Brazilian operations would become unprofitable.
The research suggests that if prices fall below US$90, the major mining companies - Rio Tinto, Vale, BHP, and Fortescue - are likely to slow expansion projects and focus on "value over volume" strategies.
Longer-Term Structural Changes
Looking beyond 2027, the iron ore market faces additional challenges. China's emissions trading system is expected to tighten, potentially increasing the use of recycled steel scrap as a substitute for iron ore. While the timing and scale of this shift remain uncertain, it represents another structural headwind for demand.
Potential upside for iron ore demand could come from India and Southeast Asia, where rising wealth levels typically correlate with increased steel consumption. However, analysts don't expect this growth to fully offset China's declining demand.
Market Implications
With the market outlook turning more cautious, UBS maintains Neutral ratings on major iron ore producers Vale, Rio Tinto, BHP, and Fortescue.
Current spot prices around US$94 already appear to be "pricing in" the expected surplus conditions in the second half of 2025, suggesting the market is anticipating the fundamental shift ahead.
