Commodities | Oct 03 2008
By Chris Shaw
Yesterday FNArena noted iron ore prices are starting to come down in global markets (“Here Come The Iron Ore Price Downgrades”; Australia; 2/10/08) and today Westpac Banking Corporation adds its views on the outlook, the bank pointing out while global steel prices remain above year ago levels they are weakening, which is putting iron ore prices under pressure.
The bank’s senior economist Justin Smirk notes prices for some types of steel have fallen by almost half from recent peaks, though the falls have been far from consistent in terms of types of steel or the markets in which the major price declines are occuring.
Smirk indicated the weakest regional markets have been Turkey, the EU, Asia and Russia, while in what may be something of a surprise the US, along with Latin America, has to date been more resilient.
In terms of products, prices have fallen the most in steel used for construction, with billets down 38% and reinforcing rods and mesh down 39%. These falls need to be kept in perspective though as Smirk notes even allowing for the recent weakness steel prices globally are up 56% from this time last year.
As steel prices weaken there has been a corresponding impact on iron ore prices, which in China have fallen 36% from their peak in March of this year and are now down 11% for 2008 as a whole, putting them in line with price levels from the first half of last year.
This leads Smirk to suggest both iron ore and steel prices have now peaked, with downside risk increasing given OECD nations are moving closer and closer to recession. For now he is retaining his forecast of flat Australian iron ore contract prices in 2009, which reflects the fact steel prices are more than 50% higher than when these contracts were last negotiated.
But Smirk expects those analysts that had been factoring in further iron ore contract pricing gains next year will now be revising their expectations to reflect the weaker environment. While steel prices remain above 2007 levels Smirk doesn’t see scope for iron ore prices to fall, but he cautions if the current trend in global steel markets extends into 2009 he will be forced to lower his expectations.