Commodities | Jul 05 2006
By Rudi Filapek-Vandyck
FN Arena News’s industry feedback is that current market expectations for a roll-over of contract iron ore prices for the year to March 2007 into the next year may be too conservative.
Metals and mining analysts at Credit Suisse have been picking up similar signals from their industry sources. Now those experts have found another reason to suspect iron ore prices may well rise further over the next two years: a presentation given by Brazil’s Companhia Vale do Rio Doce (CVRD).
CVRD is a firm believer that the fundamentals in the iron ore market have changed and that as a result of this prices will stay stronger for longer. The Brazilians have announced that this year’s market should remain "tight" – this, according to CS, should be interpreted as "remaining in supply deficit"- and next year should be even "tighter".
This should bode well for investors in iron ore producers. Most securities analysts have conservatively assumed stable prices, if not slightly weaker prices for the coming years. Given the firm industry feedback, CS suggests it may not take too long before financial markets start pricing in another strong year for iron ore prices.
The main driver behind the ongoing buoyant outlook for iron ore is, of course, further expansion of global steel production. CS reports CVRD forecasts Chinese steel production to grow by a compound annual growth rate (CAGR) of 8.5% until 2010, while the rest of the world should grow by 2.4%, averaging global growth to 4.5%.
At the same time, CS reports, CVRD made it clear they will not expand their own iron ore production excessively, with the company stating it is seeking value rather than growth.
Credit Suisse now expects iron ore prices to climb by a further 5% in each of the two following years, after which they are expected to remain stable for another year. If iron ore prices were to decline, the experts expect this to happen by 2011, at the earliest.