Daily iron ore price update (missing India adds $40)

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Find below the iron ore price complex chart for February 19, 2013:

Spot definitely wants a new high. Rebar was strong too by swaps are still stuck as rebar futures fell again.

There really is no mystery to why the iron ore spot price has detached from other fundamentals. The FT today makes it plain:

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The disappearance of Indian supply has seen world prices soar to $155 a tonne, an increase of more than three quarters since last September. The gain has swelled profits of Australian and Brazilian iron ore miners such as Vale, Rio Tinto, BHP Billiton and Fortescue.

“Today maybe it’s $40 higher than it would have been [with Indian supply]”, says Jim Lennon, chairman of commodities research at Macquarie in London, who thinks higher prices will continue this year.

“It’s a significant impact, no doubt about it… while India loses $10bn plus earnings on its balance of trade by not exporting, other iron ore producers are receiving massive windfalls,” he says.

Chances of a supply restart now rest with India’s famously slow-moving court system, which permitted limited mining in Karnataka to begin at the end of last year, and will review the continued ban in Goa soon.

But other threats remain, even if activity slowly picks up in these areas, including demands for windfall profits taxes from other mining states and the more basic problem of corruption.

“Why was India’s iron ore production so high for so long? It was because much of it was blatantly illegal,” says Sasha Riser-Kositsky, an analyst at the Eurasia Group, a risk consultancy.

“It is actually really hard to be a large-scale miner in India and have all of your papers in order . . . the whole experience speaks to the fundamental difficulty of doing business there.”

Few analysts expect a recovery this year, but some are at least optimistic of an eventual upturn. “Our view is that India will work through these current challenges and find a solution,” says a senior executive at one trading house.

But others fear India’s iron ore slump may now become permanent: “From what we understand things are not really going to change any time soon,” says another figure from a large ore trader.

Exports will remain close to zero for at least the next three to four years, and potentially for the whole of the coming decade, the trader says. Either way, in the near term at least, India’s iron ore industry faces a torrid future.

Traders will be talking their respective books no doubt. But I would not bet on a quick resolution. I’m adding $10 to my first half trading range, lifting it to $130-$160. The second half will also be stronger than I reckoned (though weaker than the first for sure), but it is very difficult to judge at this stage given it depends upon the timing of new supply and a Chinese slowing.

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.