Treasure Chest | Feb 21 2014
By Rudi Filapek-Vandyck, Editor FNArena
Drawing decisive conclusions from Chinese data is fraught with danger during the best of times, even for analysts whose job is to closely monitor one particular market segment, say steel and iron ore.
Thus far, the new calendar year has seen spot prices for iron ore in China drop by some 9% and that seems but logical given Chinese New Year and rising inventories at ports. Analysts at Macquarie also adopted this logic in weeks past, arguing iron ore seems to have run out of positive catalysts, for now, given that Chinese steel mills had done all their restocking and steel demand in general was entering what is traditionally a rather quiet period.
But now new data and insights have led to a revised view, with Macquarie analysts suggesting this Friday morning things may not seem what they look like at face value and demand for iron ore in the months ahead might turn out better than one would instinctively expect on the basis of port inventories and other data available thus far.
I am not going to annoy you, the reader, with all the intimate details of the changing insights from new sources of data that happen to have attracted the attention at the commodities research desk of Macquarie. Suffice to say the analysts are now convinced Chinese steel mills have been destocking instead of restocking since late 2013, which explains the price weakness for iron ore we've seen over the past two months.
In addition, Macquarie has also come to the conclusion that Chinese steel production is running at a higher rate than previously believed. In line with analysts elsewhere, Macquarie firmly argues that the rise in port inventories should not be interpreted at face value (it's more complicated than that).
The combination of all those factors means one thing: demand for iron ore will be better in the months ahead, not worse. Macquarie analysts are happy to stick with their average price forecast for the first six months of 2014 of US$130/tonne which implies a higher price than the current US$122.90/tonne.
Investors should note, Macquarie does also stick to the view that increased supply in the second half of 2014 should see a lower price environment kicking in from mid-year onwards, but no Armageddon scenarios seem to be on the analysts' minds.
Macquarie remains circumspect about exactly how much weakness is likely to reveal itself in the latter parts of 2014, but peers at Morgan Stanley who earlier this week also published an update on the sector, equally arguing investors should not be spooked by the rising port inventories in China, showed less hesitation in putting some cold hard numbers to their outlook for iron ore in 2014.
On Morgan Stanley's projections spot iron ore is destined to average US$125/t in the first half and then falls to an average of US$115/t in the second half.
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.
