Ore’s not well with iron ore

On the heel’s of the release of the RBA’s paper on the mining boom, and the excellent analysis by The Unconventional Economist, comes a Dow Jones Newswire piece, reposted at The Oz:

Global demand growth for iron ore is set to slow in 2012, bringing down average iron ore prices from last year’s record high.

Market expectations are that average spot prices will range between $US150 to $US160 a metric ton for iron ore fines of 62 per cent iron content delivered to Chinese ports, from $US168 a ton in 2011….

The consensus is for a fall of $US10-$US15 a ton on average in 2012, to a range of $US150-$US160 a ton, with high volatility.

A chart of the 12 month Iron Ore swaps shows where the price has been moving since January 2011, broadly in line with other risk or “undollar” assets in direction and magnitude:

Technically, the price action following a significant correction is a rising wedge or ascending triangle pattern, as prices try to clear the resistance level formed at around $131 a ton. A sustained rally back to the previous high of $160 a ton is more likely to occur if prices rally past $145 a ton, above the long term moving average and thus moving the commodity back to its previous uptrend.

Placing the bulk commodity price in a longer term context, prices are still at nearly record highs, with the main suppliers moving to the more volatile spot price moving away from quarterly contract prices (shown in red below):

The reason for the fall in prices:

The average price this year is likely to fall back to 2008 levels due primarily to a slowdown in steelmaking growth in China, which consumes well over half of global iron ore output.

China’s crude steel output grew 8.5 per cent in 2011 to about 680 million metric tons, but growth should slow to 5 per cent this year, according to market estimates. China steel production levels already fell in November and December, leaving 2011’s steel output in the Asian giant around 20 million tons lower than the 700-million-ton annual output originally forecast.

It seems doubtful that iron ore can rally back to an average $150-160 per ton just on supply constraints, as the consensus contends. What is really required is additional stimulus by Chinese authorities or their American cousins, thus moving all undollar assets up. The latter is far from assured, whilst the former is more likely.

However, given that iron ore exports to China comprise around 30% or $7 billion per month worth of Australian exports, these falls from higher levels add more weight to the notion that Australia’s terms of trade have peaked.

Comments

  1. ToT definitely peaked. This DJ/Oz report is based on various pre-Christmas/New Year analyst reports (which in my personal opinion may prove a little optimistic but of course I hope to be wrong). In order to achieve average $150-160, prices would need to be substantially higher for some periods. Not likely sans China stimulus.

    The Chinese steel market is reacting to both softness in demand and continuing domestic restructure and consolidation. There is opinion that the Chinese steel market will recover more rapidly than expected – also aided by Wen’s recent commitment to resume rail and associated infrastructure construction.

    Nonetheless, if prices and volumes hold around current levels (or above) this remains a good news story for both ToT and profits.

    Lucky Country indeed.

    • An additional often neglected downside to lower ore prices is the impact on MRRT revenues – generally considered prices in the $120 range will result in zero MRRT revenue. If that happens – Pffft – there goes another Treasury model!

      • 3d1k, You can’t be serious about treasury modelling being wrong. We all know those Canberra boffins sitting in their ivory tower on Parkes Place are brilliant.

        In their ivory tower they will be saying amongst themselves now, ‘See the Pollies have stuffed it up again. They changed our beautiful model and now look at the trouble they have got themselves into’.

      • Surely that’s how its supposed to work? No-one wants to kick the miners when they’re down, so if ore prices fall, no tax. What’s not to like?

        Of course, I reckon the tax should kick in at much lower prices — say $80/t — but the principle is the same.

        You really are a difficult person (thing?) to please MineBot.

        • Yes, it is how it will work. I suspect Treasury modelling ‘supposed’ prices somewhat higher…

          And hey, Lorax, good to see a little pro-mining sentiment from you – the Christmas subscription clearly having effect. 🙂

  2. Prince – out of interest – what is the relevancy of the accompanying picture – I don’t get it.

    Cheers.

  3. Running a bit shallow on the China demand analysis lately. Can we get a better handle on the Chinese steel industry, even indirect or anecdotal stuff? Michael Pettis is still best source I can find, even his outside the curtain blog.

    All iron ore prices contemplated above suggest nothing but rude health for Oz iron ore industry. What about volumes?

      • We link Patrick’s stuff when available, thanks Lorax – where you been?

        HnH is still on holiday wandigeo, and the UE is swamped, so you’ll have to deal with this overworked trader for China analysis for now…

      • Coverage of Chinese real estate is everywhere at present. I don’t think Chovanec is necessarily any better than the pack on that topic.

  4. Anyone know which iron ore miners are the most inefficient ? If this continues you can tell who has been swimming naked when this tide goes out

    How efficient is FMG ? How would short term iron ore pricing affect their profit margins and when do their debt covenants expire ?