NAB Latest To Lift Iron Ore Forecasts

Array
(
    [0] => Array
        (
            [0] => ((BHP))
        )

    [1] => Array
        (
            [0] => BHP
        )

)

This story features BHP GROUP LIMITED.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

National Australia Bank is the latest but likely won’t be the last to lift iron ore price forecasts, the group now expecting benchmark lump ore prices will increase by 15% in Japanese financial year (JFY) 2008.

Minerals and energy economist Gerard Burg notes in the bank’s “Iron and Steel Outlook – October 2007” report there is upside risk to the bank’s new forecast of US119.9c per long ton unit, particularly as BHP Billiton ((BHP)) has indicated it will attempt to lock in a price premium to account for lower freight costs for Australian ore relative to supply from Brazil.

In part the expected increase is the result of lower Indian spot exports, which follows the imposition of an export tax in March. The other supporting factor is that supply constraints globally have yet to ease and in Burg’s view are unlikely to do so until sometime in 2009 at the earliest.

One flow through effect Burg sees as likely is higher price pressures in the steel market, as the higher iron ore prices are coming at the same time as coal costs are increasing. On Burg’s numbers hard coking coal prices should increase by 17.5% this year while semi-soft prices should increase by 20%.

He expects steel mills will need to pass some of these increases on to customers, so how well customers deal with price increases is likely to impact on production levels in North America and Europe in particular. Burg expects hot rolled coil prices in North America will increase by a little over 5% in 2008 to an average of US$644 per tonne. This should prove a peak, as he expects prices to ease in 2009 to an average of US$600 per tonne.

Helping lift prices next year will be ongoing strength of demand for steel, Burg estimating global steel consumption in 2008 will increase by 5% to 1.36 billion tonnes, with China and India leading the way in accounting for 40% of global consumption.

China is also leading the way in terms of global production, with output forecast to increase by 10% to 540 million tonnes in 2008, underpinning the bank’s forecast of a 5.6% increase in total world production to 1.4 billion tonnes. Outside of China the bank sees world steel production growing by a more modest 2.9%.

Click to view our Glossary of Financial Terms