Why you can ignore forecasts for iron ore of US$54 a tonne for 2016

Source: iStock

Forecasting is a difficult job.

And so far, the Australian government has got it wrong more often than not in its forecasts for iron ore price over the past five years. Here’re a few examples…

In September 2011, the government forecaster predicted an average price if US$151 a tonne – it actually came in at around US$128 a tonne.

In December 2012, the government forecast an average price of US$106 a tonne in 2013. The actual average for 2013 was US$135 a tonne.

In December 2013, the government forecast an average price of US$119 per tonne for 2014. The actual average was more like US$97 a tonne.

In June 2014, the government forecast an average price of US$97 per tonne, obviously not expecting the price to stay below US$100 a tonne for very long. The average in 2015 was actually US$55 a tonne, almost 50% lower than forecast.

So feel absolutely free to ignore the Australian Department of Industry, Innovation & Science’s forecast of US$54 a tonne for the whole of 2016, and you can most certainly ignore the government’s forecasts for the years from 2017 to 2021, when the commodity is expected to remain in the low US$60 range.

On average the forecaster is wrong by 14% on its quarterly forecasts, although in some cases their predictions can be wildly wrong – by more than 40% in some cases.

Forecast date Forecast Period Actual Difference
Sep-11 151 2012 128 15%
Dec-11 139 2012 128 8%
Jun-12 136 2012 128 6%
Jun-12 131 2013 128 2%
Dec-12 106 2013 135 27%
Jun-13 117 2013 135 15%
Jun-13 112 2014 97 13%
Dec-13 119 2014 97 18%
Jun-14 105 2014 97 8%
Jun-14 97 2015 55 43%
Dec-14 63 2015 55 13%
Jun-15 54 2015 55 2%
Jun-15 52 2016
Dec-15 41.3 2016
Mar-16 54 2016
Mar-16 56 2017
Mar-16 61.4 2018
Mar-16 63.9 2019
Mar-16 64.3 2020
Mar-16 64.7 2021

Source: Department of Industry, Innovation and Science Resources and Energy quarterly reports, Average iron ore price from IndexMundi

And given the fluctuations in average annual prices, it’s also highly unlikely that iron ore will average $54 a tonne this year, $56 a tonne in 2017, US$61.40 in 2018, US$63.90 in 2019, US$64.30 in 2020 and US$64.70 in 2021.

We could well see iron ore drop to the marginal cost of the major producers Vale, BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Gina Rinehart’s Hancock Prospecting. As such, a price in the US$20 to US$30 a tonne range is possible.

If you factor in the likelihood of higher cost iron ore dropping out of the market, maybe prices of between US$30 a tonne and US$40 a tonne are likely. Add in the prospect of a long-term decline in China’s steel production and lower prices are also more likely. That’s not to mention seasonal and temporary disruptions like we have mentioned previously.

Foolish takeaway

Forecasting anything, be it weather, economic data, exchange rates, company profits or commodity prices is often proven to be wrong. While the factors behind the forecasts may make logical sense, don’t expect iron ore prices to play nicely with forecasts.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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