Iron Ore Prices

[greengiraffe]

Nerves rattled by plunging iron ore price
AAP MAY 20, 2014 3:59PM

THE iron ore price’s slide below the $US100 a tonne mark has sent nerves jangling from the Pilbara to Canberra.

The last time the commodity was that low was in September 2012. The dramatic fall back then took markets by surprise, but this time was more expected as investment banks have slashed price forecasts for the commodity in the past month.

The situation is being partly blamed on the fact that the world’s four largest iron ore miners have dramatically expanded, bringing on hundreds of millions of tonnes of new supply while China’s economy is slowing.

Iron ore was Australia’s biggest export last year earning $57 billion.

The Bureau of Resources and Energy Economics’ prediction of a 35 per cent lift to $76 billion this year is now looking unlikely. Treasury’s forecast last week of falls to $US90 a tonne by next year look correct, which would hit what the federal government says is a budget in crisis.

Deloitte Access Economics economist Chris Richardson warned that every dollar the iron ore price sheds hits national income by $800 million and the tax take by $300 million.

The spot price dropped $US2.20 to $US98.50 overnight, meaning it has now fallen about 26 per cent this year.

Analysts have abandoned iron ore, with UBS, JP Morgan and Credit Suisse among those to downgrade their price forecasts.

Goldman Sachs is among the most bearish, predicting prices to hit $US80 a tonne next year.

“We think this is a structural decline in prices rather than anything short-lived,” analyst Craig Sainsbury told AAP.

“There is an oversupply in the industry at the moment, therefore prices are suffering in what’s also a reasonably low growth steel environment in China at the moment.” He thought Fortescue Metals had reason to be nervous, given its margins are slimmer than the other large producers, but did not expect a crisis as occurred during the 2012 price collapse that brought it to the brink.

Fortescue Metals shares actually shot up today, rebounding from a 23 per cent plunge since April 9.

It announced a major increase in the size of its Greater Solomon resource.

IG market strategist Evan Lucas believes the pessimism about China was overplayed, with demand for steel products and growth strong.

While spot prices were low, futures contracts for September on China’s Dalian exchange were still a healthy $US114 a tonne, he said.

“Come September they still believe and are happy to buy iron ore at $US114 a tonne,” he told AAP.

He argued it was very difficult to predict iron ore prices beyond this year, given China’s government might stimulate its economy and part of the current oversupply was due to a lack of disruptions in a recent mild Pilbara cyclone season.

[greengiraffe]

Chinese dump iron for banks

Angus Grigg
428 words
21 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Shanghai Chinese iron ore traders are dumping stocks ahead of a June deadline to repay bank loans, according to one industry player who said demand remained weak.

Ji Minlei, a trader who operates from the port of Rizhao, said pressure from banks partly explained why the iron ore price had dipped below $US100 a tonne for the first time since September 2012.

"Some traders have been caught in the liquidity crunch and have been forced to sell," he said via phone on Tuesday.

Mr Ji said banks had been increasingly tightening credit this year and were now demanding deposits of up to 30 per cent to finance cargoes, double the previous level.

"The biggest risk to the price now is that banks further tighten credit," he said.

China's state-owned banks have reined in credit this year, fearing a spike in bad loans.

There are also unconfirmed suggestions that banks have cracked down on property developers and others using iron ore as collateral to obtain bank financing.

Mr Ji said traders were usually required to repay loans in June and December each year. He said many had been forced to sell iron ore stock in the lead-up to this deadline, even though they would be taking significant losses.

Another factor weighing on the iron ore market is the weak property sector in China, where both prices and the number of sales have begun to fall.

Official data released on Sunday showed that prices rose in 44 of 70 surveyed cities across the country in April. This is down from 56 cities where prices increased in March.

In a bid to clear excess stock developers are beginning to offer discounts of up to 40 p er cent, as many regional cities struggle to clear more than two years of supply.

This glut saw housing starts fall 25 per cent over the first three months of the year.

The chief information officer at consulting firm MySteel, Xu Xiangchun, said the weak property market was hurting the iron ore price. But he believes a pick-up is on the way, lifting iron ore to between $US100 and $US110 a tonne in the second half of the year.

"China's economy will be stabilised in the second half and we will see better growth, so it's likely the iron ore price will rebound," he said by phone.

"At present, however, the market confidence is very weak, so traders are selling off stockpiles now, fearing that others will start selling."


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[BlueKelah]

sounds pretty bearish to me

[CityFarmer]

The tightening of credit, on top of slowing growth, has stressed on highly geared sectors. It is not only on iron ore traders, but also other commodities traders, e.g. soya bean etc.

Consolidation within the sector will happen...

[Greenrookie]

The tightening of credit, on top of slowing growth, has stressed on highly geared sectors. It is not only on iron ore traders, but also other commodities traders, e.g. soya bean etc.

Consolidation within the sector will happen...

In my radar of companies, I wonder if

1) YZJ (Steel consumption intensive companies) benefits, cheap Steel (or at least we know it is not going to spike soon)

2) Lee metals or other steel stockists. Generally, pressure for lower selling price, more difficult to manage inventory.

Will this create counter-party risk for SGX iron derivatives? Maybe someone can enlighten me?

[greengiraffe]

Analysts warn against iron ore rebound hope
SARAH-JANE TASKER THE AUSTRALIAN MAY 23, 2014 12:00AM

THE sharp rebound in the iron ore price experienced after the last slump below $US100 a tonne is unlikely to occur in the current market, analysts have warned.

The iron ore price found mild support on Wednesday night after declining for two straight days at the start of the week, when it fell as low as $US97.50. The price of the steelmaking ingredient lifted 1 per cent to return to Monday’s close of $US98.50 a tonne.

ANZ analysts said concerns over potential supply disruptions from Australia, given the union dispute at BHP Billiton and Fortescue Metal Group’s port facilities, had helped seaborne prices.

Goldman Sachs’ Christian Lelong said that, although there was a strong rebound in prices when the iron ore price last slumped below $US100 a tonne in September 2012, he did not believe that would occur this time.

He said while the current downturn could trigger another destocking cycle of similar scale seen two years ago, which aided a strong rebound, the eventual rebound this time would be far less robust than previously.

The investment bank said it had growing conviction in its 2015 forecast of $US80 a tonne.

Macquarie’s team of analysts said it had been a tough five months for pure-play iron ore stocks in an environment that had seen spot iron ore prices fall nearly 30 per cent.

“All 10 stocks in our mid-cap coverage universe have suffered material share price falls verses the broader market and small resources index, which are essentially flat year-to-date,” the analysts said. RBC Capital Market’s Timothy Huff said the next round of focus on iron ore could be on product differentiation, not just pricing.

“We think iron ore product and market positioning could be a main driver of investor confidence for iron ore companies as we head into 2015,” he said.

While Mr Huff said he was not calling the bottom of the iron ore price at about $US98 a tonne, he would not be surprised to see higher realisations for cargoes with an iron ore content of 62 per cent in six weeks.

[greengiraffe]

Analysts take bleak view on iron ore
SARAH-JANE TASKER THE AUSTRALIAN MAY 24, 2014 12:00AM

IRON ore — Australia’s No 1 export earner — hit two-year price lows this week, sending shivers through the sector that a new slump in the price of the steelmaking commodity has begun.

The price continues to hover below $US100 a tonne and, while the main producers are better prepared than the last time it fell to this point (just under two years ago), revenues will be hit.

Bearish China sentiment and poor fundamentals have again been the driver of the price drop, plus new supply is being poured into the market at record rates.

Credit Suisse says there are few positives to draw from China’s ferrous sector at present, adding that the key question now is to what extent the negatives are already reflected in the price.

The investment bank said it believed that prices could display some stability in the near term, or even manage modest gains, but that the second half of this year should deliver a new low below 2012’s trough of $US87 a tonne.

The bank’s commodities team said the potential of a tug boat strike at Port Hedland that would affect exports for BHP Billiton and Fortescue Metals could lead some Chinese steel mills to take advantage of low raw material prices and trigger covering of some short financial positions.

“If this plays out, prices should temporarily arrest their recent declines and stabilise around $US100 a tonne, possibly even a little higher,” Marcus Garvey said in his latest note. “We doubt though that prices will stage any kind of more sustained rally.”

Mr Garvey added that absent a prolonged strike at Port Hedland, seaborne cargoes should be abundantly available.

Port stocks of 115 million tonnes offered a considerable buffer from which mills could draw down fresh tonnage, he said. “Policy loosening should help demand to stabilise but a bounce is unlikely,” he said. “With no organic catalyst likely to improve market conditions, we expect iron ore prices to resume their softening in the second half.”

Benchmark iron ore prices slipped as low as $US97.50 a tonne this week, which followed Treasury forecasts outlined in the federal budget that the price would fall below $US90 a tonne within two years.

Glencore Xstrata chief executive Ivan Glasenberg blamed the world’s largest producers for pushing the price lower.

“Prices are coming off because we see massive expansions coming from our major competitors,” Mr Glasenberg said this week.

“They continue to expand these brownfields and put more supply into the market.”

BHP’s iron ore president, Jimmy Wilson, outlined that the market had always been a story of supply and demand.

“Supply has increased, and if we look back this year versus last year, demand has increased by 60 million tonnes per annum but at the same time supply has increased by 120 million tonnes per annum,” Mr Wilson said.

Standard Bank is not as bearish as others on the iron ore market. It highlighted yesterday that it saw the potential for a rally in iron ore prices back towards $US105 a tonne, as the current steel destock begins to clear and as loss-making miners continue to turn off output, both in China and elsewhere.

The price regained some ground through the week on the back of stronger-than-expected data out of China. But analysts have warned that the sharp rebound in the iron ore price experienced after the last slump below $US100 a tonne is unlikely to occur this time given the ramp-up in supply from all of the major producers.

[greengiraffe]

Iron ore feels 'python squeeze'

934 words
22 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Jennifer Hewett

The iron ore price may be below $US100 a tonne but it doesn't change the views of Australian iron ore producers that it is nothing to do with a reduction in China's strong demand for Australia's key export. The more significant issue is likely to be Australia's ability to maintain its role over the next few years as a relatively low-cost and reliable producer of massive volumes of high-quality ore.

Nev Power from Fortescue Metals Group points out, for example, that Chinese steel production is at record levels of 2.3 million tonnes a day. FMG's chief executive does concede some concern at what he sees as the unintended consequences of the Chinese government's determination to keep tightening up private trade credit and financing.

The Chinese authorities took action because some private traders in China have been using the same stockpiles of commodities such as iron ore as security for different borrowings from different financiers. The determination to stop this practice by tightening credit rules has been in effect for a few months. But Power warns the impact is cumulative.

"It's like a python squeeze," he says. "It's affecting the ability of the whole private sector to get trade financing. Most still can obtain it but it takes a lot more time and effort.

"The state mills and traders are not affected, but it's undermining confidence in the private sector, which is responsible for around 50 per cent of steel production."

This hasn't yet hurt the ability of Australia's major iron ore producers to continue to sell rapidly increasing volumes in China. And the prospects for iron ore clearly haven't put off major Chinese companies like Baosteel. It has joined forces with rail haulage company Aurizon in a $1.4 billion bid for Aquila Resources in an effort to develop iron ore holdings in the Pilbara.

Power, who is in China, says prices may rise quite quickly if the government changes tack – as he expects will happen. He believes the longer financing restrictions continue, the greater the risk to growth rates. The impact of a sharp reduction in the iron ore price also affects a lot more than the bottom-line profits of the big miners in Australia. Just ask Joe Hockey about the impact on the government's beleaguered budget.

BHP Billiton's president of iron ore, Jimmy Wilson, emphasises an increase in supply of iron ore in China of 120 million tonnes per annum, compared to an increase in demand of 60 million tonnes. Wilson jokes he doesn't give price forecasts because they are likely to be wrong.

Yet even if this latest price shock proves temporary and manageable, it's far from the only problem facing Australia's iron ore producers.

A deeply concerned Wilson is warning of the potential for 56 tugboat deckhands at Port Hedland to take strike action and disrupt roughly $100 million a day worth of iron ore exports from the Pilbara port.

This action would also badly affect other port users like Fortescue and Atlas. Fortescue is already threatening legal action against the union.

'We are very concerned about the cost to the Pilbara iron ore suppliers and to the Australian economy and to the industry's standing," Wilson says. "This goes to the heart of Australia's national interest … they are literally holding us to ransom and that is something we have to push back on."

Wilson says he is still hopeful a strike can be averted through negotiations, but nearly a year's worth of bargaining with the Maritime Union of Australia has yet to produce anything other than a deadlock and a union ballot authorising strike action.

BHP and Fortescue have both had discussions with the federal government about the potential for Canberra to intervene in the national interest. Wilson says bluntly the current industrial relations pendulum has swung too far in favour of unions. But it is also clear the Abbott government expects companies to resist unreasonable demands from the unions under current laws.

The MUA wants a 40 per cent wage increase for deckhands over the next four years and a reduction in work from six months of the year to four and a half months.

According to Wilson, such "onerous and unreasonable" demands for already high-paid workers would set a dangerous precedent on productivity for the economy and for other agreements. He says negotiations with other unions have been far more cognisant of the cost pressures and the need to increase productivity, but that the WA branch of the MUA is very aggressive.

"The consequences of a strike would be very significant for our organisation, for our competitors, for the West Australian government through royalties, for the federal government through taxes and for the communities in which we operate," Wilson says.

"It would also impact long-term investment in Australia … our customers all read the media and our marketing teams are in constant contact about this."

Given the costs to its business and to the industry's reputation, one option facing BHP is the potential for a brutal trade-off. BHP has an unrelated $2.8 million damages action against the MUA following "stop works" in June. This is due in court on Thursday. The company withdrawing the action would clearly limit the financial risks to the union and its members. Wilson says this issue is unrelated, but concedes it could "play into" the dispute. This is the ugly reality of dealing with the MUA.


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[greengiraffe]

Analysts split on iron ore outlook

Big picture Karen Maley
708 words
24 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
How worried should investors be after the iron ore price plunged below $US100 a tonne this week?

The price drop has certainly weighed on the share prices of mining stocks, although mining giants BHP Billiton and Rio Tinto have so far escaped relatively unscathed.

In contrast, Fortescue Metals Group's share price sagged to around $4.60 (well below its 2014 peak of $6.23 a share), while mid-cap miners with heavy exposure to iron ore, such as Atlas Iron, BC Iron and Mount Gibson, were also dealt with more roughly.

Analysts point out the large mining companies can withstand the iron ore price drop because not only do they benefit from lower production costs, they also have access to higher-quality grades of iron ore that they sell at a premium.

Rio is estimated to break even at about $US44 per tonne, while BHP is around $US55 per tonne. Mount Gibson's cash costs are much higher, at $US84 per tonne, while those of Atlas Iron are around $US80 per tonne. Fortescue breaks even at around $US72 a tonne.

All the same, analysts concede that the drop in the iron ore price – if sustained – will dent the profitability of BHP and Rio this year.

According to Credit Suisse figures for the 2015 year, a $US10 movement in the iron ore price wipes $US2.1 billion ($2.3 billion) from Rio Tinto's bottom line and $US1.2 billion from BHP Billiton.Supply, credit measures hit sector

Analysts say there are several reasons why the iron ore price has come under pressure in the second quarter of the year.

One reason is the increase in supply, particularly the additional 19 million tonnes being produced by BHP, Rio and Fortescue. In addition, Chinese domestic iron ore producers have ramped up production after the winter break, and this has hit the market in the past few weeks.

At the same time, Chinese demand for iron ore has weakened in the wake of Beijing's efforts to clamp down on excessive credit growth. Some traders had been using stockpiles of commodities, such as iron ore, as collateral for loans. As Chinese banks have tightened credit, traders have been forced to liquidate their stockpiles to repay bank loans.

The pressure on the iron ore price has been exacerbated by the slowdown in China's residential property sector, which accounts for about one-quarter of steel consumption in the world's second-largest economy. The latest Chinese figures show that new construction starts in the property sector measured by area were down 24.5 per cent in January-April compared with the same period in the previous year.China slowdown fears 'overblown'

But although the price of iron ore has plunged by more than 25 per cent this year, taking it deep into bear territory, many analysts hope the price could start to recover in the second half of the year.

They point out that there could be some disruption to iron ore supply in the second half when BHP closes two shipping berths at Port Hedland to install new ship-loading equipment.

What's more, they argue that concerns about China's economic slowdown are overblown, with a key gauge of China's factory activity showing signs of stabilizing in May, and Beijing likely to introduce additional stimulus measures to boost growth in coming months.

The Bureau of Resources and Energy Economics had forecast an average price of $US110 per tonne for 2014, before dropping to around $US103 per tonne in 2015.

But investment bank Goldman Sachs is more pessimistic. It forecasts the iron ore price will average $US105 per tonne in the September quarter, before falling to an average $US100 per tonne in the December quarter. As global supply continues to ramp up, Goldman Sachs expects the price of iron ore to plunge to $US80 a tonne in 2015.

Of course, mining companies can soften the effect of lower iron ore prices by introducing efficiencies to cut production costs. But analysts warn that if Goldman Sachs's forecasts are correct, some mid-cap miners – particularly those with lower-quality ore deposits and hefty debt burdens – could face some major challenges.


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[greengiraffe]

Iron all price slides further

MITCHELL NEEMS BUSINESS SPECTATOR MAY 29, 2014 8:37AM

THE iron ore price has fallen further as fears over weakened steel demand in China continue to weigh on the commodity.

Benchmark iron ore for immediate delivery to the port of Tianjin in China is trading at $US96.80 a tonne, down from $US98.10 in the previous session.

Last week the iron ore price crashed through the $US100 a tonne mark for the first time in nearly two years and it currently sits at its lowest point since September 13, 2012 when it traded at $US96.10 a tonne.

Credit Suisse this week warned that even if iron ore manages some stability in the near term — or even modest gains — the second half of the year is likely to see the commodity price fall below 2012’s low of $US87 a tonne.

The investment bank sees few positives in China’s ferrous sector currently, posing the question as to what extent these negatives are already reflected in the price.

Australian exporters of iron ore — the cheapest in the world — still have headroom for exports at current prices, but some smaller companies will likely have to reconsider planned expansions if the price continues to slide.

It has been a volatile year for the commodity, dropping more than 25 per cent since January 2.

In March, the iron ore price charted its largest one-day fall in four years to hit $US104.70 a tonne. It later rallied to $US119.40 by early April, before steadily easing.