Iron ore is at the bottom!!!

A little knowledge is a dangerous thing. From The Australian:

BHP Billiton’s unspecified deferral of a small Port Hedland expansion helped accelerate buying from steel mills getting back into the iron ore market…The run has been helped by Rio this week saying it shipped 10 million tonnes less iron ore in the March quarter…Both blamed weather…but there is a feeling the three big miners have taken the foot off the accelerator…

On the demand side, April Chinese construction and infrastructure order surveys by Macquarie show steel requirements are starting to pick up after a slow start to the year…big miners think that buying will dry up as prices near $US60…But they also think steel mills will now see prices around $US46.70 as a bottom…

…West Australian Premier Colin Barnett yesterday appeared ready to take some credit for the price rise…“I haven’t said that directly to them (BHP) but I think they read the newspapers,”

Let’s unpack this:

BHP has deferred a tiny portion of expansion for six months because it was cheaper to do it that way;
insiders tell me that BHP has no intention of cutting back on volume growth for the all of the reasons that MB readers know well. Specifically, the big miners have fresh experience of losing market share in a parallel commodity that they do not wish to repeat. In 2011 when the QLD floods closed the heartland of Australian coking coal production, it opened the door to American suppliers into Asia. Despite four years of prices falls and a big breakeven advantage since, BHP is yet to succeed in pushing those Americans back out of the market. Growth of volume and preservation of market share is thus the priority in iron ore;
forward orders firming for steel mills at this time of year is the normal seasonal pattern. There’s been enough Chinese stimulus already to float the Titanic but the response has been muted to say the least. Some signs of life is to be expected;
prices are nowhere near the bottom. The surplus is going to triple from 70 million tonnes (mt) to 200mt (or higher) in the next eighteen months. Mills will restock for a while and then launch another assault on the price;
Colin Barnett is trying to save his political skin but to the extent that he has helped Fortescue refinance he has badly damaged both his state and nation.

There’s more bottom feeding at the AFR:

There’ll be no net growth in supply in 2015, down from a forecast in September for an additional 94 million metric tons and a February outlook for an extra 50 million tons, analyst Ian Roper said in an April 21 report received on Thursday. Ore will average $US55 a ton in the third quarter, the report said.

…”Prices will remain under pressure in the second quarter but a floor may be forming as the large low-cost producers rethink investment in the current weak market,” ANZ said in a report on Thursday.

…The price should have a “fairly strong floor around $US60 once we get through this period of volatility,” Robert Mead, a Sydney-based money manager at Pacific Investment Management Co, said at a briefing in Australia on Thursday.

Let’s unpack this then:

roughly 100mt in new iron is hitting the market this year and next and the one after that. I’ve only seen 20mt exit the seaborne market so far this year. If we add all of the Australian juniors that number will rise to about 50mt. China could account for another 50mt fall except that demand there will fall this year by 2.5% which equals roughly 30mt less iron ore so they’ll roughly cancel each other out. Next year is the same calculus but with less high cost ore to remove. 2017 is worse again with less high cost ore to remove. Indeed, that’s when the real fireworks start as the low cost producers duke it out over still shrinking Chinese demand. That’s why the rescue of FMG yesterday is the only actual news that matters;
there is no “rethinking investment”;
a “price floor”, Robert? How about $120?

Meanwhile, the hysteria has suddenly infected steel markets as well. From The Australian:

The executive chairman of the Australian arm of giant Japanese conglomerate Mitsui said yesterday that despite the collapse of iron ore and coking coal prices as supply has soared, the intensity of China’s steel consumption has still not peaked.

Yasushi Takahashi, the first Japanese executive to address Melbourne Mining Club, said that US steel intensity peaked in the 1970s and Japan’s in the 80s, when those countries’ urbanisation reached 60 per cent.

While “China is coming closer to that peak”, its urbanisation rate remains in the early 50s, he said. “There’s a lot of room for them to urbanise more … which will stimulate more steel demand.

Ah, the most common mistake in economics, confusing aggregates with rates of change. It does not matter if China continues to urbanise another 10% if the process is past the halfway point (and it is). The volume of urbanisation per annum will begin to shrink and so will steel demand.

Better sense from the AFR, from Clinton Dines, former BHP chief in China, on BHP’s and RIO’s 1 billion tonnes forecast for Chinese output:

“Anyone with any nous would query it as a very nice round, convenient number. How could you ever forecast that?”

AFR Weekend has been told consulting firm McKinsey helped Rio and BHP formulate their Chinasteel forecasts, which are similar.

…Prominent economist Ross Garnaut believes the forecast has been even more influential and used as the basis for delivering tax cuts and spending increases by successive federal governments, which have ultimately proven unsustainable.

He describes it as the “circularity of elite communication” in Australia, where business leaders, politicians and bureaucrats move in the same circles and often form similar views.

That’s exactly what we are seeing today again, the “circularity of communication”.

Clyde Russell sums it up well:

The future loss of 20 million tonnes from a market that’s oversupplied by multiples of that amount clearly isn’t a sound basis for a price rally.

What it does show is a market where many participants are keen to call a bottom, and are happy to grasp onto any positive news as justification for a price rally.

It also shows that many in the market weren’t really reading into this week’s quarterly production reports from BHP Billiton, Rio Tinto and Brazil’s Vale.

…What remains abundantly clear from the production reports is that the world’s big three iron ore companies are producing at record levels and remain committed to mining more.

The only thing that changed this week for the iron ore outlook is that FMG got its ponzi bond away, guaranteeing massive oversupply for that much longer, the complete opposite of the media pet shop view.