by Chris Becker
Credit Suisse is moving towards a short term view of a rally in iron ore, following its decidely negative stance late last year:
There could be a short-term price rally above our forecast if limited port stocks are depleted while supply is seasonally low in the MarQ. We would not require a steel production
bounce for the price rally – flat on DecQ would be sufficient – just a strong wet season in Australia, and normal winter mine closures in China.
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CS point to the obvious lack of traditional restocking in December, with the emphasis on port stocks for resupply. Last week port stocks fell precipitously, indicating they might be right:
Port stocks stood at 95Mt at endDecember,but 2013 illustrated that 70Mt is effectively zero. At that level mainstream brands are scarce and inbound cargoes see competitive bidding. The underlying 70Mt is purchased ore awaiting transport and unwanted low-quality material. Therefore, China’s steel mills are effectively relying on 25Mt of port stocks (1 wks coverage) to see them through the MarQ.
MarQ is a seasonal low for iron ore exports as Australia and Brazil face wet seasons. Over the last four years, MarQ exports were on average 32Mt lower than the preceding DecQ. China mines also see outages in winter.
If the 2015 wet season is strong, and costs Australian producers the full budgeted 10-day loading outage, then China’s port stocks could be depleted and steel mills have to bid for prompt cargoes – driving up the price.
For Australian investors this means not mistaking what is a temporary gain for a permanent bottom in the price of iron ore. Furthermore it provides opportunity to speculate in the short term future of both the junior stock, Atlas Iron (AGO), Mt Gibson (MGX) etc plus Fortescue (FMG) and possibly the BHP/RIO quango.