Here is today’s iron ore update:
Hints of stabilisation on Friday but it’s still anyone’s guess if this is the bottom. I’m pretty skeptical so long as Chinese steel prices are still falling.
Meanwhile my views on iron ore have been perfectly captured in a note by Ric Deverell, the widely respected head of commodities at Credit Suisse via FTAlphaville:
Our feeling is that the current adjustment is in large part a move to a lower trading range: In trend terms, global steel production looks to be increasing now at around a 2.5% p.a., while seaborne exports of iron ore continue to grow at an 8% p.a. pace.
With global growth momentum weak, and China’s steel demand having moderated, we now believe that the opportunity for a return to a market in shortfall has diminished.
It is worth noting, however, that markets tend to overshoot to the downside during dramatic events. Given the cuts to Chinese production under way, and a “buyer’s strike” by mills, while the risk in the near term is for further falls, we expect prices to rebound to around US$100 in Q4, before slowly eroding towards longer-run averages over subsequent years.
Importantly, however, we consider it most unlikely that prices settle anywhere near the historically low levels seen in the early 2000s, which we feel will prove to be the historical outlier.
While a bounce is likely, the assumed stabilization will need a substantial reduction in Chinese iron ore production, as well as some recovery in steel production as the stimulus feeds through. Absent both of these factors, prices could still surprise to the downside.
…Further stagnation in demand could still see a retreat, albeit temporarily, below the US$80, the long-term historical price average.
I personally see the ultimate equilibrium point a little lower but the argument is exactly right. China and steel can grow fine, our terms of trade can remain historically high and Australia will still need to find a new equilibrium of its own.
