Find below the iron ore price table for March 27, 2013:
Given yesterday’s poor macro news flow around iron ore and the lack of support coming from Chinese steel prices, it is clear that market dynamics are in control right now so more upside is not a silly proposition. Either that, or we just got a bit oversold.
The ANZ’s Mark Pervan has timely note today arguing that bearishness in iron ore markets is overdone:
We’ve made only modest downgrades to iron ore prices. We think some of the rish calls are overdone.
- Cooling tactics in the China property market are not working.
- The industry will need to increase supply to control price.
- Rising iron ore supply is well known. Returning high-cost Chinese output will only reinforce a high floor price.
Let’s note first that despite his bullish prognostications, Mr Pervan is cutting his forecasts so there is some rhetorical butt-covering going on here. Having said that, his forecasts remain well above mine and consensus (I suspect).
Pervan’s first point does not stack up. He may be right that property restrictions are not working but given they’re only two weeks old it’s a little premature to say so. The fact is, if the Chinese want property development to slow, it will. And the past six months is surely evidence enough that it can do so without killing the economy if supported by infrastructure development.
That renders Pervan’s second point redundant. But it is still worth noting that the ANZ team seems addicted to this notion that only supply elasticity determines property prices. Paul Braddick puts the same arguments about Australian property. They seem unable to grasp that “underlying demand” for property is itself affected by property market conditions. If growth in the market slows so does demand as speculation and panic buying ease. That in turn effects the pace of economic and income growth, further subduing demand.
Pervan’s third point is right. But given the first two are wrong it doesn’t really matter. The supply expansion underway was planned for much higher levels of steel output growth over the next few years. It ain’t coming, so oversupply is.
Pervan finishes with a good argument for why Rio has been so gloomy lately:
The Rio Tinto call for much lower prices is an intriguing one. The big diversified miner is heavily reliant on the iron ore market, and it would seem strange to jeopardise that earning potential. We think it may be a posturing exercise, with the big player potentially trying to shake out unwanted marginal output. This would be consistent with the recent change of senior management looking to create a sustainable backdrop for their markets. That said, Rio is in a good position to call prices lower, parked right at the bottom of the global industry cost curve. A more cautious development would be if Rio was to back up a lower price call with a pull back in its output plans – something that hasn’t occurred.
A nice observation. Only problem is, it’s also true. Full report below.
ANZ Commodity Insight Iron ore Mar13.pdf by Heidi Taylor
