Slumping iron prices are set for a sharp rise in the medium-to-long term, Severstal Head of Strategy Thomas Veraszto told CNBC’s “Worldwide Exchange” on Monday.
Iron ore prices have fallen sharply since the start of August, in part due to the weakening economic picture in China. Prices currently range between $80 and $90 per metric ton, their lowest level since December 2009. However, Veraszto, forecasts a strong recovery in prices over the longer-term to $107 per metric ton or higher.
Despite disappointing Chinese manufacturing data for August from both the government and HSBC, Veraszto said markets were underestimating the country’s future demand for steel, which he forecast would grow at 4-5 percent over the next few years.
“I still think there is ample room for growth in steel consumption in China. If you look at the cumulative steel per capita that exists in China today, it is running at around 25-to-30 percent of what we have in the U.S. and Europe, so there is still a lot of room to grow,” he said.
“Although there may be cyclical problems, I think the long-term story of continuing urbanization and investment into infrastructure is still intact,” he added.
Versazto’s bullish view on China was supported by Jeremy Friesen, commodity strategist at Societe Generale, who spoke to CNBC earlier on Monday.
“In China, there’s a big pipeline of projects. It will just take Beijing to slowly ease conditions, which they will do sometime in the fourth quarter or before the fourth quarter, and we should see a turn that will help base metals, and should help iron ore as well,” Friesen said.
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Veraszto said additional upward pressure on iron ore prices will come from increased mining costs, with both capital expenditure and operating costs set to rise steeply.
He added that iron prices were currently suppressed due to the poor quality of ore coming onto the market.
Severstal announced its second quarter and first half earnings last Wednesday. The Russian steel and mining giant reported a 74 percent year-on-year fall in quarterly net profit, which came in at $155 million, rather than $249 million as forecast.
Veraszto attributed the disappointing performance to losses in the foreign exchange market and to its spin-off of Nord Gold, its gold-producing subsidiary, earlier this year.
To view Severstal's Thomas Veraszto appearance on CNBC, click here.
— By CNBC.com's Katy Barnato