Commodities | May 17 2006
By Rudi Filapek-Vandyck
Can investors safely assume that Brazil’s Companhia Vale do Rio Doce’s (CVRD) iron ore fines price settlement is the harbinger of what is yet to come from the continuing negotiations between the big three in the sector and their Chinese and Japanese customers?
The local expert community certainly seems to think so. As has been the case over the past five years, CVRD, the world’s number one producer of iron ore, has set the tone with the first price settlement of the new year and equity broker analysts are of the opinion that it will be tough for Asian steelmills to not accept a similar price as that which Thyssen Krupp signed off on.
The 19% price rise agreed between CVRD and Thyssen Krupp follows a hike of 71.5% last year and can only be described as a very good result (for the iron ore producers, not for the steel sector) given that many experts were anticipating a price rise of 10-12%. The most bullish ones had set their target at 15%.
While the news is unmistakably positive for the numbers two and three in the sector, BHP Billiton (BHP) and Rio Tinto (RIO), it won’t set their share prices on fire as the direct impact, if confirmed with an Asian settlement, will only be a few percentages on the market’s current EPS forecasts. It does take away some of the doubt that had been creeping in, though.
The Chinese, who are leading this year’s negotiations with the major iron ore producers, are yet to agree to the 19% price hike, with some press reports citing Chinese steel officials rejecting the figure. It is believed Chinese steel mills have set an unofficial ceiling to this year’s price rise of 10%.
Some experts, like Vicky Binns and her team at Merrill Lynch, now simply believe the Chinese will have no other option than to accept a similar price rise. Merrills believes the CVRD announcement will soon be followed by a Japanese acceptance of a 19% price rise and what options do the Chinese have left then?
The biggest impact in the Australian market will be to the bottom line of Portman (PMM).
UBS resources specialists have taken the opportunity to further throw their support behind the share prices of BHP and RIO. While commodity prices may well fall further still, the analysts note current market consensus expectations are well below spot prices for commodities. This would suggest the risk to market consensus expectations for BHP and Rio profits for the near term would seem limited.