Td Raises target to $44.00 from $41.00Action Notes Summary Equity Research April 21, 2021 Full Report | Table of Contents << Click Here for Full Report >> Prices of high-grade iron ore (65% Fe, CFR China) hit a new record this week, reaching US$223/t. At the same time, the spread between high-grade material and benchmark iron ore (62%-Fe, CFR China) widened to a record US$35/t as steel producers seek to maximize the use of high-grade material to boost production and take advantage of record steel prices in both China and the United States.
Steel production has rebounded sharply through the first quarter of 2021 as economies recover from the pandemic-lows of 2020. The World Steel Association (WSA) is calling for 2021 steel demand to increase by 5.8%, led by a substantial recovery in advanced economies. In 2022, the WSA is forecasting a further increase in demand, albeit at a more modest 2.7%, as growth moderates from key producing regions, including China. WSA's forecasts largely mirror global GDP growth, which, according to the IMF, is expected to grow 6.0% in 2021 and a further 4.4% in 2022.
Higher iron ore price forecasts— Although rising COVID-19 cases and environmental curbs on steel production in China continue to be a risk factor, we believe that the global re-acceleration should continue and be very supportive for iron ore demand. Therefore, we have increased our 2021, 2022, and 2023 highgrade iron ore price forecasts by ~7% on average to US$178/t, US$125/t, and US $95/t, respectively. We have also increased our long-term price forecast (starting in 2024) to US$90/t from US$85/t previously.
Sharp rebound in pellet premiums — One of the major beneficiaries of the strong pricing environment for steel has been the demand for premium iron ore products, including high-grade concentrate and pellets. Spot prices of blast furnace (BF) pellets have increased 135% YTD to US$66/t, while direct reduction (DR) pellets (~66-68% Fe-content), a feedstock for electric arc furnaces, are up 160% YTD to US$78/t. Both LIORC and Champion should stand to benefit from this current shift to high-quality material. As a reminder, following the completion of the Phase 2 expansion of Bloom Lake, Champion will have the ability to produce up to 15Mt of DR-grade concentrate, which should attract a nice premium over and above its current high-grade concentrate. We also expect Iron Ore Company of Canada (LIORC's 15% equity interest) to maximize its output of pellets. We are currently modelling 2021 pellet sales of 10.6Mt, including a combination of both BF and DR pellets. Target prices increased — We have increased our target price for Champion Iron to $8.00 from $7.00 and maintained our BUY rating. We have also raised our target price for Labrador Iron Ore Royalty Corp to $44.00 from $41.00 and maintained our BUY rating.