It may not have been long ago that Tom Price’s forecast of a $70 iron ore price in the September quarter of this year would have been laughed at. But last year’s tumble has put paid to that. As regular readers will know I have been forecasting my own second half rout for iron ore spot so its interesting to examine someone else’s reasoning. First, Rusty versus China property crackdown:
…media + investors are struggling to balance impacts of these two industry events: potential macro-shift in China vs. an epic supply-constraining storm in Iron Ore World, downtown Australia.
…reality is, ‘Rusty’ will pass over within days; may result in some days (not weeks) of loading delays; but these will likely be so minor as not to register in reported exports (company/ABS); any lost tonnes should be recovered by the industry within weeks/months.
…but China’s potential policy shift matters more
- therefore, we’ll all soon get back to worrying about: 1. how China’s central govt could move to stamp out price buoyancy in national property sales; 2. how much this is likely to hurt steel + iron ore demand growth.
- but newsflow-to-date suggests departing Wen Jiabao (i.e. incoming Li Keqiang won’t formally step-up until March) is only moving here to moderate the current lively trade in the property sector – rather than annihilate all sector activity, at the risk of impairing broader economic growth.
Plus seasonality and the supply deluge:
- we’ve observed that like all CYH1 spot trades since the 2010 termination of the long-standing annual ‘benchmark’ pricing culture – 2013H1 so far appears to be another period of spot price stability (Iron Ore: explaining spot price volatility, 21-Jan-13).
- what normally happens in CYH1? once restocking commences, an ‘acceptable’ range for the trade’s various spot signals is established; it remains intact until season ends (about June); post-season, buyers withdraw from trade; liquidity weakens; spot signals fall. equity implications?
- we think only upside risk now relates to a lack of Indian ore => trade virtually collapsed Dec-12 (political dramas) => this event has transferred greater spot pricing power to Australia in the Asia trade => may create price-spike events in coming months => attractive to hedge funds;
- next big move? price weakness in 2013Q3, when steel production rates across Asia moderate + raw materials buying eases; Q3’s weakness will be exaggerated this year because of an Australian-led supply-lift (Rio Tinto + FMG; Global I/O: Mining & Metals – Iron Ore: a game of 2 halves, 31-Jan-13).
- since spot prices fell to US$88.5/t cfr in 2012Q3 (7-Sep) on trade’s seasonal weakness alone, this year’s corresponding supply lift threatens an even lower spot price outcome (need a number? try US$70/t cfr fines).
- note, UBSe 2013Q3 avg is a higher US$113/t fob (+7-10/t for freight; Snakes and ladders, 11-Dec-12); 2013H2 = US$110/t fob.
I personally think that with Indian ore out of the market effectively for good $70 is too low (God help us if Indian exports resume mind you). But a repeat of last year’s pricing range would be no surprise at all. More to the point, China saved iron ore last year with its push through of renewed infrastructure spending. Will it do so again?
If this forecast transpires, it will coincide with the peak in the mining investment boom meaning just one thing for the Australian economy: recession in 2014.