Steel-making materials stocks, those exposed to iron ore and coking coal, have markedly outperformed our near-term expectations. The key reasons have been continued strong steel demand growth, particularly in China, and more recently, Vale’s tragic dam failure in Brazil and Cyclone Veronica in Australia. Iron ore supply losses this year are material, about 6% of global iron ore supply and some of that will bleed into 2020. Coking coal supply has also been impacted in the near term by increased safety inspections, closures and environmental regulation in China. Thermal coal supply has been added and was not as impacted by inspections.
Overall, we see the mining sector as overvalued. Our global miners trade on an unweighted average 21% premium to our fair value estimates. We see the iron ore and coking coal exposed stocks as most overvalued. Rio Tinto (RIO) trades at a 46% premium to our fair value estimate, Anglo American 38% (AAL), and BHP (BLT) a 27% premium. The base metals miners are generally less overvalued. Current iron ore and coking coal prices are elevated by what we think are short-term supply disruptions and current demand drivers are unlikely to persist. The rational oligopoly argument for iron ore is unlikely to hold up, particularly if high prices persist.
All these mining firms are rated no-moat, ie. they have no defendible competitive advantage. Of the global miners, our fair value estimates for Anglo American and Glencore (GLEN) have been increased. Higher near-term iron ore and coking coal prices are the key drivers for Anglo American, while for Glencore, it’s coking coal and a higher spot zinc price. Anglo American also benefits from the higher nickel spot price. Of our total mining coverage, Rio Tinto is the most expensive of the group.
On the demand side, steel consumption has continued to grow more rapidly than expected. In 2018, steel production grew 4.6% globally and an even more rapid 6.6% in China. China accounted for 75% of the global growth in steel production in 2018. Iron production, essentially new steel made from iron ore and coking coal, is important for raw materials demand. In 2018, iron production grew more slowly at 2.2% a year, but still at a faster than expected rate. China’s iron production grew by 3% in 2018, accounting for 85% of the growth in global iron produced in 2018.
The key changes to our commodity price forecasts are an iron ore price of $78 per tonne in 2019, and $65 per tonne in 2020 versus $72 and $60 per tonne previously. We’ve extended the time we expect coking coal to decline to our long-term price for a year to 2022. We now expect the price to average $150 per tonne to 2021, versus $120 per tonne previously. Spot sits around $200 per tonne because of strong steel demand and supply disruptions in China. The spot price for nickel increased 5% to $5.90 per pound and zinc by 14% to $1.34 per pound. We also raised our copper price assumption for 2019 only by 10c to $2.80 per pound with prices to date tracking modestly ahead of our prior forecast.
