UBS says iron ore consensus is too low: What it means for BHP, RIO and FMG

UBS has revised its long-term iron ore price forecast upward, asserting that market expectations are too conservative. The investment bank believes consensus estimates underestimate China's demand for iron ore beyond construction, overstate iron unit supply growth by focusing on total ore tonnes, and overestimate industry flexibility in dealing with rising costs.

China's pivot to manufacturing and the industrialization of the "Global South" will strengthen iron ore demand over the next decade. While China's steel production has fallen about 21% since its 2020 peak due to weaker construction, blast furnaces are running near 90% capacity and scrap is supplementing iron ore instead of replacing it. China's growing demand, combined with the rise of developing countries like India and Indonesia as steel import destinations, will keep global steel demand growing through 2035.

Supply growth will lag headline figures because of declining ore grades and the depletion of high-grade deposits. The market will need about 50 million more tonnes of iron ore than previously estimated this year. New mines to replace existing production are more expensive and located further from infrastructure, leading UBS to forecast industry spending on new supply between 2027 and 2035 to be about 60% lower than the previous nine years.

However, UBS still expects a modest surplus in supply and believes the market will tighten after Simandou reaches full production in 2029.