Treasure Chest | Jun 12 2013
– Analysts agree on near term price pressure
– Disagree on sustainability of lower prices
By Greg Peel
Two weeks ago when the Chinese spot iron ore price fell under US$120/t, Deutsche Bank analysts suggested a fall of a further US$10-15 was on the cards. Deutsche based its forecast on a supply-side argument, suggesting lower than expected production in Brazil would be offset by increased production in Australia, enhancing the availability of ore on the seaborne market.
With China on a holiday break the spot iron ore price is currently sitting at US$110.90/t. Deutsche Bank’s global commodities team is now calling a fall below US$100/t, suggesting the price pattern is reminiscent of the same pattern one year ago. Last year the spot price fell very sharply into the northern summer, dropping from 140 to near 80/t. The past six months have seen a rebound to 140 and another pullback. Chinese steel mills are overproducing, notes Deutsche, inventories are high and demand appears moribund. Despite lower prices for iron ore and coal, Chinese steel prices are only following costs lower, and this is putting pressure on mill margins.
Morgan Stanley notes Chinese iron ore imports rose 2% in May from April to a monthly record 68.6mt. The increase reflects a very high level of domestic pig iron and blast furnace steel production in May and provides justification for strong iron ore prices earlier in the month. Morgan Stanley expects imports to ease in coming months as production and capacity utilisation in China falls back. Hence iron ore prices should also ease.
Deutsche Bank was previously recommending a shorter term trade which meant shorting nearer term iron ore futures and buying March quarter 2014 futures, but now is happy to go short into 2014 before looking to cover mid-year. Hence the analysts believe this time iron ore prices will remain lower for longer.
Goldman Sachs is currently forecasting an average 2014 price of 115/t, falling to 80/t in 2015. But in the shorter term, Goldman notes record steel production is continuing in China yet inventories are falling, suggesting steel demand remains robust. On that basis, Goldman forecast two weeks ago that the iron ore price would fall, but that the price cycle would be shorter and shallower than the fall seen last year.
Goldman noted steel inventories were falling but Deutsche suggests they’re still on the high side. Macquarie is noting Chinese inventories of iron ore have been falling this year so far, unlike inventories of other commodities. Thus while seaborne iron ore supply is expected to increase in the second half, leading to fears of a price tumble, Macquarie believes steel mills will replenish inventories and hence prices will be supported. Thus Macquarie suggests a sustained fall below the 100/t mark is increasingly unlikely and that a 2013 average price of 120/t is justifiable.
Clearly there is little agreement among analysts, but suffice to say the spot iron ore price is under pressure and Chinese cycles of destocking and restocking will usually lead to significant price volatility.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
