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04-01-2016, 08:27 AM
Iron ore gloom to continue in 2016
DateJanuary 4, 2016 - 12:15AM
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Stephen Cauchi
Business reporter
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The first quarter of 2016 may see the price of iron ore, Australia's biggest mineral export, slip below the record-low prices it touched in 2015.
Ore with 62 per cent iron content delivered to the Chinese port of Qingdao finished the year at $US43.57 a tonne, having reached lows of $US38.30/tonne in December. The raw material fell for the third straight year in 2015 and has lost 80 per cent since peaking in 2011 at $US191.70.
Indeed, December's nadir was the lowest price since 2005, based on annual pricing that preceded the current spot-based system.
And in the same way that Iran is about load even more oil into a global supply glut, Gina Rinehart's Roy Hill mine is about to do the same for an iron ore market that really doesn't need it.
But while analysts generally agree on the causes for iron ore's decline, they disagree on how long it will stay at these levels and whether the first quarter of 2016 will be the most bearish yet.
The early signs for 2016 are not looking good. Iron ore stockpiles at ports in China are heading into 2016 at the highest level in more than seven months, according to a recent Bloomberg report.
"Stockpiles have been on the rise because domestic demand is getting weaker and shipments from the major producers have increased," Dang Man, an analyst at Maike Futures in Xi'an, said last week. Mills have "been cutting production, which reduces demand for iron ore; so a lot of the stocks have remained at ports".
Holdings rose 0.8 per cent to 93.1 million tonnes last week in the final reading of 2015, according to Shanghai Steelhome Information Technology. The inventories are at the highest since May 2015 and have expanded for four months.
"Inventories will continue to rise in 2016," Ms Dang said, forecasting that the holdings will probably climb back above 100 million tonnes. It won't be a continuous increase because some high-cost mines will halt shipments, but the rising trend will persist, she said.
Faltering Chinese demand
Faltering Chinese demand for steel, of which iron ore is the major ingredient, is a major driver of the current bear market. A stronger US dollar – in which commodities like iron ore are priced – is a secondary factor.
UBS commodities analyst Daniel Morgan has declined to pinpoint a bottom price for iron ore, other than to say that it would not trade in the $US30s for a sustained period.
However, Mr Morgan said that as the price entered the $US30s, junior iron ore miners – including Australian producers such as Arrium and Atlas – would come under severe pressure to close mines. That, in turn, would support the price.
Other possible bullish influences were the Samarco mine disaster in Brazil – which will cost BHP and Vale billions of dollars – and delays in ramping up at Roy Hill.
ANZ head of commodities Mark Pervan maintains that iron ore would come under most price pressure in the first quarter of 2016.
Mr Pervan said the timing of iron ore orders and shipments revolved around the Chinese New Year holidays from February 7 to February 13.
Usually the Chinese placed orders for iron ore in the fourth quarter, stockpiling it in the first quarter for steel production after the holidays finished, he said.
Consequently, there were fewer iron ore orders placed in the first quarter when demand was traditionally weak. That would especially be the case this year.
Chinese mills folding
Furthermore, said Mr Pervan, many Chinese steel mills would soon go out of business, further dampening demand for the raw ingredient.
ANZ is forecasting iron ore to trade at $US40 and $US45 in the first and second quarters of 2016 respectively, followed by $US45 and $US50 in the third and fourth quarters.
Bernstein's most recent forecast stated that Rio Tinto was one of the very few investable stocks in the space.
Bernstein's current price deck has iron ore trading at an average price of $US54 in 2016 and $US60 in 2017, two or three dollars above the consensus figures.
Deltec chief investment officer Atul Lele believes iron ore will trade in the $US30s for the next three to six months.
It could even go lower. "Iron ore could go to the $US20s," he said in December. "All the demand indicators have just rolled over."
And investors should forget about buying resource stocks, including Rio, he said. "We're short the whole sector globally," he said. "We're going to see a number of mining companies go under."
Deutsche Bank's Australian chief economist Adam Boyton has stated that $US36 a tonne is a likely floor for Australian producers and $US26 is an absolute floor. And with Australia being a low-cost producer, it's likely these floors will apply globally as well.
Read more: http://www.smh.com.au/business/markets/iron-ore-gloom-to-continue-in-2016-20151217-glpulr.html#ixzz3wEN5PHDd
Follow us: @smh on Twitter | sydneymorningherald on Facebook
DateJanuary 4, 2016 - 12:15AM
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[Image: 1436146815911.jpg]
Stephen Cauchi
Business reporter
View more articles from Stephen Cauchi
Follow Stephen on Twitter Email Stephen
[Image: 1451810729145.jpg]
As Iran is about load even more oil into a global supply glut, Gina Rinehart's Roy Hill mine is about to do the same for an iron ore market that really doesn't need it. Photo: Carla Gottgens
The first quarter of 2016 may see the price of iron ore, Australia's biggest mineral export, slip below the record-low prices it touched in 2015.
Ore with 62 per cent iron content delivered to the Chinese port of Qingdao finished the year at $US43.57 a tonne, having reached lows of $US38.30/tonne in December. The raw material fell for the third straight year in 2015 and has lost 80 per cent since peaking in 2011 at $US191.70.
Indeed, December's nadir was the lowest price since 2005, based on annual pricing that preceded the current spot-based system.
And in the same way that Iran is about load even more oil into a global supply glut, Gina Rinehart's Roy Hill mine is about to do the same for an iron ore market that really doesn't need it.
But while analysts generally agree on the causes for iron ore's decline, they disagree on how long it will stay at these levels and whether the first quarter of 2016 will be the most bearish yet.
The early signs for 2016 are not looking good. Iron ore stockpiles at ports in China are heading into 2016 at the highest level in more than seven months, according to a recent Bloomberg report.
"Stockpiles have been on the rise because domestic demand is getting weaker and shipments from the major producers have increased," Dang Man, an analyst at Maike Futures in Xi'an, said last week. Mills have "been cutting production, which reduces demand for iron ore; so a lot of the stocks have remained at ports".
Holdings rose 0.8 per cent to 93.1 million tonnes last week in the final reading of 2015, according to Shanghai Steelhome Information Technology. The inventories are at the highest since May 2015 and have expanded for four months.
"Inventories will continue to rise in 2016," Ms Dang said, forecasting that the holdings will probably climb back above 100 million tonnes. It won't be a continuous increase because some high-cost mines will halt shipments, but the rising trend will persist, she said.
Faltering Chinese demand
Faltering Chinese demand for steel, of which iron ore is the major ingredient, is a major driver of the current bear market. A stronger US dollar – in which commodities like iron ore are priced – is a secondary factor.
UBS commodities analyst Daniel Morgan has declined to pinpoint a bottom price for iron ore, other than to say that it would not trade in the $US30s for a sustained period.
However, Mr Morgan said that as the price entered the $US30s, junior iron ore miners – including Australian producers such as Arrium and Atlas – would come under severe pressure to close mines. That, in turn, would support the price.
Other possible bullish influences were the Samarco mine disaster in Brazil – which will cost BHP and Vale billions of dollars – and delays in ramping up at Roy Hill.
ANZ head of commodities Mark Pervan maintains that iron ore would come under most price pressure in the first quarter of 2016.
Mr Pervan said the timing of iron ore orders and shipments revolved around the Chinese New Year holidays from February 7 to February 13.
Usually the Chinese placed orders for iron ore in the fourth quarter, stockpiling it in the first quarter for steel production after the holidays finished, he said.
Consequently, there were fewer iron ore orders placed in the first quarter when demand was traditionally weak. That would especially be the case this year.
Chinese mills folding
Furthermore, said Mr Pervan, many Chinese steel mills would soon go out of business, further dampening demand for the raw ingredient.
ANZ is forecasting iron ore to trade at $US40 and $US45 in the first and second quarters of 2016 respectively, followed by $US45 and $US50 in the third and fourth quarters.
Bernstein's most recent forecast stated that Rio Tinto was one of the very few investable stocks in the space.
Bernstein's current price deck has iron ore trading at an average price of $US54 in 2016 and $US60 in 2017, two or three dollars above the consensus figures.
Deltec chief investment officer Atul Lele believes iron ore will trade in the $US30s for the next three to six months.
It could even go lower. "Iron ore could go to the $US20s," he said in December. "All the demand indicators have just rolled over."
And investors should forget about buying resource stocks, including Rio, he said. "We're short the whole sector globally," he said. "We're going to see a number of mining companies go under."
Deutsche Bank's Australian chief economist Adam Boyton has stated that $US36 a tonne is a likely floor for Australian producers and $US26 is an absolute floor. And with Australia being a low-cost producer, it's likely these floors will apply globally as well.
Read more: http://www.smh.com.au/business/markets/iron-ore-gloom-to-continue-in-2016-20151217-glpulr.html#ixzz3wEN5PHDd
Follow us: @smh on Twitter | sydneymorningherald on Facebook