Commodities | May 31 2006
By Chris Shaw (Tokyo)
China withstood the demands of producers for as long as possible, but its need for iron ore has seen it (soon) agree on 19% price increases, an outcome in line with the settlements reached with Japanese, South Korean and European steel producers.
The outcome was better than expected for the iron ore producers, as evidenced by National Australia Bank’s forecast of a 10% increase. In the bank’s view the outlook for the market remains good, as it now expects prices to be rolled over into the next Japanese financial year.
The bank notes China remains the key to global iron ore prices, as while it is the world’s largest producer it cannot meet the demand from its domestic steel producers, forcing it to import ore from other nations. Other major buyers such as Japan and Europe are unlikely to require significantly more ore this year, as their respective steel industries are forecast to show only modest increases in production as they attempt to limit output to support prices.
Steel production in China on the other hand is tipped to increase 12% this year, with the bank cautioning the risk remains to the upside thanks to large amounts of idle capacity and ongoing additions to capacity. As a result China’s imports of iron ore rose 28% year-on-year in the first three months of 2006 to 81 million tonnes, following an increase of 32% in 2005.
Also helping keep the market tight globally is the fact the iron ore industry is similar to other commodities in that the supply response is taking longer than expected to flow through.
The bank notes the major producers such as CVRD, Rio Tinto (RIO) and BHP Billiton (BHP) are attempting to increase their capacity, but no significant increases are likely prior to late in 2007, providing further support to the bank’s view contract prices will be rolled over next year. (At Credit Suisse the analysts are suggesting there may still be a small price increase next year). Based on current development timetables, the bank notes up to 40m tonnes of new capacity could be in place by the end of this year, but the net impact could be half this thanks to a depletion of existing supplies.
For the first three months of this year Australian iron ore exports actually fell 3.2% to 54.6m tonnes, though this reflects lower throughput at port facilities thanks to the impact of a number of cyclones.
At the same time, the costs associated with new project developments are also increasing as fuel and labour costs move higher and competition for these inputs increases as commodity producers generally compete for scarce resources.
As a result, National Australian Bank remains positive on the outlook for the iron ore market, even though it is anticipating steel prices will weaken into 2007 thanks to higher inventory levels as exports of lower quality output from China and other developing nations increases. It expects iron ore prices in 2007 to be unchanged from this year’s US$95.26/tonne, while it expects steel prices to decline from US$585.1/tonne in 2005 to US$572.3/tonne this year and US$510/tonne next year.