Iron ore weakens again

The SMH report this morning that Rio is striding towards ever greater expansions of its iron ore output:

Rio Tinto has revealed plans to expand its flagship iron ore operations in Western Australia beyond previous expectations, but the news has been dampened by confirmation that capital costs for the project will also rise higher than previous guidance.

Rio has long planned to lift its iron ore production in the Pilbara from 225 million tonnes per year to 333 million tonnes, but Rio iron ore boss Sam Walsh said this morning that expansion target would be lifted further to 353 million tonnes by 2015.

That seems as good an excuse as any to return to the iron ore market for a quick update. Since we last checked in, iron ore has bounced handsomely:

From its recent low of $117, we’ve jumped to $147 on renewed Chinese buying. Here is how Chinese port inventories of iron ore look now:

That teensy dip in the top right of the chart is the recent inventory rundown. I note as well that last week stocks surged again to an all time high.

That’s not terribly reassuring. We really haven’t yet seen a big disruption in the Chinese ore cycle but prices have been smashed (then rebounded). It’s little wonder then that futures have decisively rolled over. Here is the Singapore 12 month swap:

We might read this chart  a number of ways. We could be setting up a double bottom but if so we’ll need to rocket through $130 very quickly. More likely, it seems to me, we’re about the plumb new lows, which throws up some very interesting questions. $120 is the now accepted market floor for the iron ore price because at that level Chinese production begins to become unprofitable and will diminish.

But there are a couple of circumstantial reasons to think we are about to test that thesis. Firstly, Brazil’s export totals were hammered in October. From Steel Orbis:

According to the statistics provided by Brazil’s National Union of the Industry of Extraction of Iron and Base Metals (Sinferbase), in October this year Brazil’s iron ore exports amounted to 20.5 million metric tons, falling 16.7 percent compared to September this year.

The share of the world’s largest iron ore exporter Vale in Brazil’s total iron ore exports in October equalled 92.5 percent, amounting to 19 million metric tons.

Meanwhile, in the first 10 months of 2011 Brazilian iron ore exports fell slightly by 0.2 percent year on year to 228.5 million metric tons. Vale’s share in Brazil’s total iron ore exports in the January-October period of this year was 91.5 percent, amounting to 209 million metric tons.

By contrast, Australian Port Hedland shipments fell under 1%:

This is confirmation that Brazil’s clients, no doubt in Europe, have really hit the brakes (as was reported a month ago). It shows that there’s going to be plenty more iron ore on the market for the foreseeable future. More for Asia that is. Which brings us to our second reason. Today, China reaffirmed its intention to deflate property. From Bloomberg:

Chinese Vice Premier Li Keqiang said measures introduced to control the nation’s property market are at a “critical stage” and that the government should maintain the curbs, the official Xinhua News Agency reported.

Li also called for increased efforts to construct and “fairly distribute” affordable housing to low-income families, Xinhua reported today. The vice premier made the remarks while visiting the city of Langfang inHebei province on Nov. 25, where he checked on the implementation of the government’s affordable housing policies, Xinhua reported.

The government intensified property measures this year with limits on mortgages and restrictions on home purchases in about 40 cities, as well as aiming to build 10 million affordable housing units to boost supply. Some brokerages including Barclays Capital Research and asset managers such as CBRE Global Investors had earlier forecast that falling home prices in cities including Beijing and Shanghai may prompt the government to roll back some of its tightening measures.

“We expect the government to continue its current purchase and credit restrictions instead of easing them soon, which should constrain property market activity in coming months,” UBS AG analysts Tao Wang and Harrison Hu said in a report dated Nov. 25, predicting a 10 percent decline in housing starts for the next 12 months. “The most important factor underlying this outlook is policy.”

UBS expects property prices to drop by 10 percent to 15 percent in first-tier cities next year, and by 5 percent to 10 percent in other cities, they wrote.

One wonders how long it will be before iron ore expansion plans slow.

David Llewellyn-Smith
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  1. Couple of quick points:

    Iron ore expansion plans are based on multi year outlooks. Whether the outlooks are right is another matter but transient drops in demand are unlikely to cause any serious changes in planning. Having said that I’m surprised that Rio would be ramping it up.

    Transient prices can drop below the cash cost of marginal producers. We saw this with base metals during the worst of the GFC. In some cases the price level probably knocked out half the market and was unsustainably low. With iron ore the market is a tad different but probably no reason why swaps couldn’t go below the generally accepted floor. The thing is though that the price is unlikely to stay below this floor for any length of time barring a steel industry armageddon, perfect storm, [insert other cliches here].

    What does 3d1k think?

        • Lol – impeccable timing. Anyway HnH, try the occasional mildly positive spin – it remains that given all the global economic negativity abounding two major resource companies have reconfirmed commitment to substantial projects in Australia. And that is good news, until otherwise advised. 🙂

      • You are quite right. Transient movements in pricing will not alter project direction. The Rio announcement is fully expected (although the ebullience contrasts strongly with pervading doom) and BHP announced a nearly $1b spend in the Pilbara a few days back. Both these companies have real space available to allow for continued project development within a range of pricing. As always it will be the marginal producers most affected. Today BHP advised that China steel production was unlikely to rise any time soon – but it should be remembered that steel production has been at a record high, falling global demand and tight margins in China will place a lid on ore pricing for a time. Atlas recently said they thought ore would fluctuate between $120-$170 (my thoughts are that is a little optimistic in both directions, at least for now) but expect continued volatility.

        And again RMA I agree, financial armageddon all bets off. No financial armageddon, mild Chinese stimulus, business as usual.

        • The point of this post is that the weakness is clearly not that transient. It will go well into 2012 even without further European deterioration. If it does, it will slow investment.

          • IF. As I said above, just for the moment, let’s enjoy the fact that in the face of near overwhelming negativity, two major resources companies, cognizant of global economic conditions, have announced commitment to significant projects in Australia.

            Yes, one day IF all goes arse up, they may suspend development. I suspect if it gets to that point it will be the least of Australia’s concerns.

            Don’t worry, be happy.

  2. Mining PR Bot Fanboy Lurker returns…just to add for those that are not aware that China will launch its own IO platform at the end of this year “in a bid to manipulate the global pricing of the raw commodity”

    I look forward to AndyDrago’s input.

  3. There was a article on Bloomberg the other day that stated that shipping operators were running huge losses due to insufficient goods for the number of ships, being that there was a massive ship building spree a year or two back, would that also reduce demand for iron ore

    • I can be a winner out of this.

      I was looking at stories in the U.S about how cheap used shipping containers are. because of the trade imbalance for physical goods, it is cheaper for China to build a new shipping container out of Ozzie iron ore, than to transport an empty one back to China from L.A.

      They may get real cheap her soon too.

      I was looking to put 3 on a block or rural land to build a house as a hobby. Looking at this, I may require a 4th for a gun cabinet, but it may be cheap none the less.

        • Yeah I got a design already, my first career desire was architect and I have some acute skills there. I would like 2 contaners aligned side by side in an E-W direction, with the third parallel but offset slightly to the east.

          The roof of the 2 side by side would be an entire 25 degree gradient facing due north and fitted with one hughe ass solar panel array.

          Surrounded by timber decking in 3 direction (sans-south) and internally would be something like XPS, maybe something with a higher thermal mass if they face north.

          But do need my guns, to keep the CSG (and any random miner to be honest) crew at bay.

          • I didn’t realise you were anti-mining…not with your steel built shipping containers and guns, quite likely constructed from Australian resources and shipped in vessels made from raw materials similarly sourced and using computer which again without resources not possible. Electricity. Oil. Everything really. Thought miners might be your best friend.

  4. Anyone notice that bid for flinders mines last week at twice what the Mkt thought it was worth? Money talks boys and sort of infers there is some confidence out there

    • no sort of infers human folly never changes and most sheeple dont know how to value assets particularly at height of 1 in 200 year commodity bubble