Daily iron ore price update (squeezing FMG)

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Here is today’s iron ore complex chart:

And the ore chart:

As well as steel chart:

The restock and rebound is over for steel and iron ore seemingly. This may be seasonal, coming into the slower winter months, but the falls in the 12m swap speak volumes to me. This has been a very weak rebound by historical standards and the swap is signaling structural weakness in the market for the long term. The 12m/spot spread is still wide for this price level:

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It should probably be closer to 5% based upon history so there is scope for further spread compression, as well as falls in the price bracket.

Today’s news flow contradicts this view of the iron ore glut. The FT reports that Rio will announce shortly that it will continue its $4 billion Pilbara expansion. And Andrew Forest is spruiking in The Oz today:

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FORTESCUE chairman Andrew Forrest has committed to completing new iron ore mine projects that will put the company back on track to reach its development targets in Western Australia’s Pilbara region despite a raft of projects being put on ice three months ago as prices plunged.

In an interview with The Australian in Beijing yesterday, Mr Forrest said the suspended projects, which saw capital spending and staff numbers being slashed, could all be restarted by the end of next year as he was confident about China’s economy and the ability of its new leaders to step up the pace of reforms.

Mr Forrest said recent data on the Chinese economy indicating that the slowdown had at least bottomed confirmed his view that things would improve into next year.

I am sorry but both of these can’t be true. If Rio is going to continue to expand there is no way FMG will as well. Both will be expanding directly into a growing glut. Rio can trade price for volume, FMG can’t. Having said that, it’s pretty clear that Forrest agrees, at least in some dark place in the back his head. Touting a resumption of shelved projects by the end of next year may as well be next century.

Meanwhile, China’s steel industry is improving, according to CISA:

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China’s steel industry will face better circumstances in the fourth quarter and in 2013 after posting whopping losses in the first three quarters, an industry insider said.

Liu Zhenjiang, vice president of the China Iron and Steel Association, said Saturday at a steel industry forum that most large and medium-sized steel companies have shaken off losses since October, but their main steel business are still suffering losses.

“The year 2012 is the most difficult year for China’s steel industry since the beginning of the 21 century,” Liu said.

Data from the CISA showed Chinese steel companies posted total losses of 5.5 billion yuan (US$874.32 million) from January to September, compared with total profits of 38.7 billion yuan (US$6.21 billion) registered during the same period last year.

The industry will face better situations in the last quarter and in 2013, but strict control of production capacity will still be prioritized due to excessive capacity in the industry, Liu said.

He urged the country’s steel enterprises to step up restructuring and upgrading to enhance their market competitiveness and capabilities of sustainable development.

No boom ahead there. The dream is over even if some are still sleep walking.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.