Iron ore price to fall 27% by end of 2022: CBA

Issued at 2022-06-06

Key Points:
- Iron ore prices hit all-time highs of almost US$220 per tonne last July
- CBA sees iron ore finishing the year at US$100 per tonne
Significant reductions in iron ore prices could see the ASX 200 miners reduce future dividend payouts

The latest commodity price forecast revisions from Commonwealth Bank of Australia (ASX: CBA) could impact ASX dividend investors eyeing long-term payouts from the likes of Fortescue Metals Group Ltd (ASX: FMG) and BHP Group Ltd (ASX: BHP).

Both of the iron ore giants showered investors with record dividend payouts over the past year on the back of all-time high prices for the industrial metal. But CBA is forecasting iron ore prices are due for a significant retrace.

What’s been happening with iron ore?

Iron ore reached nearly US$220 per tonne in July last year before sliding to US$92 per tonne in November and then rebounding once more. It’s currently trading for just under US$135 per tonne.

With the miners flush with cash, much of which was returned to shareholders, this sees BHP currently trading on a 11.0% trailing dividend yield and Fortescue paying a whopping 15.2% yield.

But if CBA’s commodities team has it right, the big miners may need to tighten their belts in the face of a 27% drop in iron ore prices by year’s end.

What is CBA forecasting?

CommBank’s director of mining and energy commodities research Vivek Dhar said CBA has “made significant revisions to our commodity price deck”.

Industrial metal and iron ore prices remain beholden to Chinese policy. We anticipate that China’s COVID‑19 lockdowns will ease enough by [the second half of] 2022 to enable policy support measures to boost China’s demand impulse. Base metal prices should lift from [the third quarter of] 2022 to [the fourth quarter of] 2022 as a result.

Our declining iron ore price profile indicates China’s plan to reduce steel output production this year. Steel production will likely need to be constrained later this year, echoing restrictions [imposed in 2021].

CBA forecasts iron ore prices will fall to US$120 per tonne by the end of September and finish 2022 trading for US$100 per tonne.

Gazing further ahead, CBA analysts see a further 20% slide the following year, with iron ore trading for US$80 per tonne at the end of 2023 and likely staying in that range into 2025.