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Iron ore prices hit new low as supply surges and China shuts steel mills
THE AUSTRALIAN NOVEMBER 10, 2014 12:00AM
Barry FitzGerald
Resources Editor
Melbourne
epa03367925 A handout image dated 29 October 2011 and made available 23 August 2012 by Australian Fortescue Metals Group Ltd ...
A Fortescue Metals Group stacker, reclaimer and conveyor system at Christmas Creek. Source: Supplied
A HORROR week in what has been a horror year for iron ore has taken prices for the steelmaking raw material to fresh five-year lows.
Iron ore prices as measured by The Steel Index fell $US3 a tonne, or 3.8 per cent, last week to $US75.50 a tonne, taking the decline so far this (calendar) year to 44 per cent.
Last week’s fall was put down by some to steel mill closures mandated by Beijing to improve air quality ahead of the Asia-Pacific Economic Co-operation meeting.
But the wall of new supply hitting the seaborne market during the traditionally quiet November for the all-important Chinese steel industry was more telling, according to analysts.
Notwithstanding most analysts tipping a rebound in prices before the end of the year, the severity of the price slump is now testing the viability of all but the lowest-cost producers.
That has been reflected in the share price drubbing of Australia’s higher-cost producers since the start of the year, with Atlas down by 80 per cent, Mount Gibson 56 per cent, BC Iron 82 per cent, Gindalbie 76 per cent and Grange 50 per cent.
At the new lower level of $US75.50 a tonne, few if any of the higher-cost producers would be achieving break-even results on all-in sustaining cost basis.
Without a sharp near-term improvement in prices, the higher-cost producers will be forced to review the carrying value of their assets, cancel new projects, and slash costs to the bone. The dividends they were able to pay in last calendar year’s $US135-a-tonne iron ore price environment will also be jettisoned.
Andrew Forrest’s Fortescue is fully exposed to iron ore’s beating. And although it is the lowest-cost producer behind the more diversified Rio Tinto and BHP Billiton, its shares have taken a 45 per cent hammering since the start of the year.
The higher prices that prevailed earlier in the year mean that the year-to-date average for iron ore of $US101.20 a tonne is down a lesser 25 per cent on the same period last year. The producers are also benefiting from the weaker dollar.
But the $US33.80 a tonne fall in the year-to-date average nevertheless represents a $US24bn revenue hit across the Australian industry.
The surge in production by the local industry, at a time when Chinese demand has slowed, has been the subject of criticism by West Australian Premier Colin Barnett, and “wannabe’’ iron ore producer Glencore.
According to the Bureau of Resources and Energy Economics, Australian exports in 2012 of 492 million tonnes accounted for 42 per cent of global seaborne trade.
China using weak prices to stockpile iron ore
THE AUSTRALIAN NOVEMBER 10, 2014 12:00AM
Iron Ore Tianjin China
Australian iron ore stockpiles at the docks in Tianjin, China. Picture: Jayne Russell Source: Supplied
CHINA is building up its iron ore stockpiles to take advantage of the commodity’s weak prices despite deliberately slowing steel production over the past month.
New figures released by Xinhua-China Iron Ore Price Index showed stockpiles of imported iron ore at 33 major Chinese ports surged 1.44 per cent last week compared with a week earlier due to weak demand.
Iron ore inventories at the 33 ports across China rose by 1.47 million tonnes to 103.44 million tonnes, one of the highest levels in the past year. Most Australian imported iron ore is stored at the Tianjin port, south of Beijing, the largest in China.
The Xinhua report said a slowing economy and mounting environmental pressure was hurting the profit margin of the steel industry, softening demand for iron ore.
China has slowed production and output in the Hebei region, the steel capital of China, in a bid to reduce pollution during the Asia-Pacific Economic Co-operation leaders’ meeting, which begins today in Beijing.
Production at more than 100 plants in the province has been shut down to ensure there are blue skies in the capital when the world’s political and economic leaders arrive.
The move, along with uncertainty over China’s future economic growth and worries about the its steel industry, has created major volatility in the iron ore price over the past few months.
The commodity is now trading down 44 per cent this year and Morgan Stanley last week forecast iron ore could head to $US70 a tonne by the end of December.
The investment bank said the price could be further pressured by Chinese steel mills experiencing trouble accessing finance.
In Beijing, China Energy Net analyst Han Xiaoping said it was likely that iron ore prices would drop further as greater supply, especially from Brazil, came on to the market.
“The sharp fall that we have seen in the iron ore price is due to the fact there is a major supply and demand imbalance in the market right now,” Mr Han told The Australian.
“The amount of iron ore coming on to the market keeps growing, but demand is shrinking in China because there is an economic transition under way and the economy is stagnant.
“I don’t see demand growing in a big way in the future because the growth up until now has been very substantial and steel consumption has reached a peak.”
Lange Steel Information Research Centre director Xu Xiangchun said current iron ore inventories were almost a record, which occurred in April when China had 120 million tonnes on hand.
“The Australian producers are currently expanding their output but I do not think that demand is going to be better in the next two to three years,” he said.
“The foreign companies are trying to gain market share, but almost half of the small iron ore producers in China have gone bankrupt and the big steel companies are also struggling.”
Shandong Steel, the largest steel company in China’s east, this week said it would sack 10,000 workers in the next few years in an attempt to restore profitability. It has forced its top ranking managers to take major pay cuts of up to 50 per cent to bring down the company’s costs.
Chinese President Xi Jinping yesterday told the APEC chief executive summit if Chinese economic growth slowed to 7 per cent the country would remain in strong shape.
Additional reporting: Wang Yuanyuan
Iron ore miners smashed: $10b value disappears
PUBLISHED: 0 HOUR 19 MINUTES AGO | UPDATE: 0 HOUR 0 MINUTES AGO
Iron ore miners smashed: $10b value disappears
Of the four Australian pure-play iron ore miners, Atlas Iron has been worst-hit by a drop in ore prices with its market capitalisation plunging 78.4 per cent to $216.1 million as of November 7, down from $1 billion at the start of the year. Photo: Ian Waldie
Company Profile
Atlas is an independent Australian iron ore company, mining and exporting Direct Shipping Ore from its operations in the Northern Pilbara region of Western Australia. Atlas is currently mining at an annualised export rate of 10Mtpa and is targeting exports at an annualised rate of 12Mtpa in 2014.
http://www.atlasiron.com.au
Iron ore is a giant game of chicken
The crashing iron ore price has wiped more than $10 billion of value off Australia’s four key pure-play iron ore miners so far this year, with Atlas Iron worst hit by the broad sell-off.
Together, Fortescue Metals Group, Mt Gibson Iron, Atlas Iron and BC Iron have suffered enormously from the close to 45 per cent fall in the iron ore price this year. A combined $10.2 billion has been wiped of their market capitalisations since December 31, analysis by The Australian Financial Review shows.
Atlas Iron has been worst-hit by the reaction to the price crash, with its market capitalisation plunging 78.4 per cent to $216.1 million as of November 7, down from $1 billion at the start of the year.
BC Iron has lost about $473.6 million in value, bringing it down 73.6 per cent to a current market capitalisation of $169.6 million while Mt Gibson is $620 million lighter at just $480 million.
Fortescue has seen $8.3 billion wiped off its market capitalisation this year, representing a decline of around 46 per cent from $18.1 billion to just $9.8 billion.
Driving these dramatic losses is the plummeting iron ore price which crashed to a fresh five year low last week of just below $US76 per tonne, levels not seen since June 2009.
The price is down almost 45 per cent this year, now hovering about $US75.80, with some analysts predicting it could go as low as $US70 by year’s end.
The price has been suppressed by new Australian supply that came on-stream this year, flooding a market already dealing with cooling Chinese demand.
Independent resources analyst Peter Strachan said he can’t see any end to the pain in the iron ore business because the market hasn’t been as responsive as expected in removing high cost producers.
“If the iron ore price falls further it isn’t going to be good news for these companies,” Mr Strachan said.
“In the next few weeks I am expecting to receive announcements about job losses, further measures to cut costs, the impact of low grade discounts. It’s going to be a tough period ahead, especially for companies that are reliant, as Warren Buffet says, on the generosity of a stranger – the bankers.”
The falling Australian dollar has provided some respite for iron ore exporters but has been as yet unable to keep pace with the staggering decline of the iron ore price.
Year-to-date, the S&P/ASX 300 Metals and Mining Index, a barometer for the health of the mining sector, has dropped 447 points, or 13.2 per cent to 2933.4, as of November 7.
Analysts predict that if depressed prices continue, Australia’s third force in iron ore will have difficulty reducing its debt bill, which stood at $US6.9 billion at 30 September.
Fortescue would require more debt if the iron ore price remained below $US79 per tonne for an extended period, and the Australian currency remained around $US0.88, Deutsche Bank analyst Paul Young wrote recently.
Analysts are also closely watching BC Iron and Atlas Iron after both miners revealed in their latest quarterly reports that they were struggling to break even.
“Atlas’s achievements on cost reduction, while admirable, are with the assistance of the falling Australian dollar only sufficient to match the impact of recent iron ore price declines,” Goldman Sachs analyst Owen Birrell said in a recent note.
“While full-year 2015 and 2016 guidance upgrades are positive for sentiment, we highlight that wafer-thin margins are likely to persist in the near term.”
The Australian Financial Review
Citi paints bleak iron ore picture
NOVEMBER 11, 2014 1:45PM
Mitchell Neems
Business Spectator Reporter
Melbourne
There is no relief in sight for struggling iron ore miners, with Citi tipping the iron price will fall below $US60 a tonne in late 2015.
In a note today, Citi downgraded its average forecast to $US74 a tonne in the first quarter of 2015, sliding even further to an average of $US60 a tonne in the third quarter.
Citi said it expects the iron ore price will briefly dip below $US60 a tonne.
The group is eyeing an annual average price of $US65 a tonne in both 2015 and 2016.
Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently hovering around five-year lows, touching its lowest point since June 2009 last week at $US75.50 a tonne.
The iron ore price has now lost 45 per cent in 2014.
Citi said while the decline in the iron ore price in the first half of the year was due to increased supply, the current sell-off is being driven by deteriorating demand and deleveraging of traders and Chinese mills.
The group also said it expects Chinese steel demand to weaken further in early 2015.
"While APEC and pollution related measures are currently negatively impacting demand, fundamental demand trends have been slightly better in Q4," Citi said in its note.
"However, we expect a further deterioration in steel demand in Q1 on the back of extremely tight credit conditions in 2Q14 (typically there is a six-month lag to steel demand), slowing of manufacturing export growth, and the government prioritizing reform over short-term growth."
Citi's note follows ANZ yesterday downgrading its own iron ore forecasts for 2015 by 22 per cent to an average of $US78 a tonne.
Beijing’s clear skies prove a dark cloud for iron ore
DOW JONES NOVEMBER 11, 2014 4:25PM
ROCKETING iron-ore production has hammered the price of the steelmaking ingredient this year, but now there is an unexpected issue hurting the market: China’s hospitality.
China’s push for clear skies at a global summit in Beijing is delivering the latest knock to iron ore that has tumbled sharply this year on record output from Australia’s major miners.
It is a reminder of how the world’s No. 2 economy still influences the global commodity markets, even in unexpected ways.
Steel mills and factories have been temporarily closed for the high-profile Asia-Pacific Economic Cooperation forum in an effort to clean up the pollution that frequently blots the capital.
“Chinese steel production has been severely curtailed over the past week, “ said Citi analyst Ivan Szpakowski.
Steel “demand in northern provinces has also been strongly affected” as much construction activity has ceased, he added.
Mr Szpakowski today downgraded his forecasts for iron ore to $US65 a tonne next year and the year after, a cut of nearly one-fifth on his prior estimates and lower than the spot price of $US75.50 a tonne. He said he thinks prices will briefly dip into the $US50s in the second half of the year as the glut of surplus material balloons.
CITI: Bleak outlook
Chinese authorities have limited traffic and enforced a “special air pollution control plan” that involves shutting factories to reduce smog, for the duration of the gathering that includes US President Barack Obama and Japanese Prime Minister Shinzo Abe.
Heavy polluters across provinces including Hebei and Shandong, major steel-producing regions, were told to take a break, as Beijing also placed restrictions on road traffic and replaced nearly half a million flowerpots downtown to spruce up for the occasion.
The official Xinhua News Agency last month reported Chinese authorities planned to reduce air pollution in and around Beijing by as much as 40 per cent during the summit. The skies are clearer, although pollution levels have been mixed day-by day.
While no official figures on the potential impact on industrial production have been released by Beijing, Australia and New Zealand Banking Group estimates steel mills with a combined annual capacity of 100 million tonnes were hit by the restrictions. That means about 4 million tonnes of steel production may have been lost — a drop in the ocean against China’s annual output of 800 million tonnes, but enough to rattle confidence in a market that is already worried about the nation’s waning appetite for iron ore.
Iron ore is down nearly 6 per cent over the past fortnight as the output restrictions took hold, trading at its lowest level since June 2009 and 44 per cent below the price the red dirt attracted at the start of the year.
As the biggest buyer of many natural resources, including copper and cotton, global investors are focused on every utterance of a Chinese official and every snippet of the country’s economic data. But even one-off events like the APEC summit, with the country finding itself under the international spotlight, can have salient consequences on the demand for and prices of some of the world’s most important commodities.
In early 2008, diesel prices rocketed on stockpiling in China ahead of the Olympic Games. The country hoarded supplies to ensure it had a backup for its unreliable power grid at a time when millions of eyes around the world were on Beijing.
That demand spike played a key role in oil’s climb to its record of $145 a barrel.
Of course, the recent steel-output cutbacks upsetting prices are only temporary. And some analysts say the impact has been more potent in terms of sentiment than real demand for the commodity.
Still, there are few bullish on its outlook and analysts are turning more sour on the outlook.
RBC Capital Markets on Sunday cut its iron-ore forecasts by 11 per cent — 16 per cent over the next three years, including slashing its 2015 expectations to $US85 a tonne from $US100 a tonne previously. ANZ has also this week cut its forecasts.
“It is a constant grind lower at the moment,” said Ian Roper, a Singapore-based analyst for broker CLSA.
Government data over the weekend showed iron-ore imports rose 17 per cent from a year earlier in October, suggesting demand for foreign ore may not be as weak as anticipated. Analysts are worried about how much steel China actually needs, though, as its exports of the finished product rise sharply.
Domestic purchases of steel have been waning due to the weak property market. China’s construction industry consumes half of its steel.
“Iron-ore demand has hit a speed bump in what was already an oversupplied market,” said Ric Ronge, a Melbourne-based fund manager at Pengana Capital. “In terms of the big picture, the environmental restrictions are a fringe issue, but without demand to clear the market any sort of recovery has been pushed out.”
Dow Jones
BHP, Rio ‘threat’ to China links
THE AUSTRALIAN NOVEMBER 13, 2014 12:00AM
Andrew Burrell
WA Chief Reporter
Perth
Fortescue Metals Group AGM
Andrew Forrest says the mining giants are acting recklessly. Picture: Theo Fakos Source: News Corp Australia
FORTESCUE Metals chairman Andrew Forrest says mining giants BHP Billiton and Rio Tinto are threatening Australia’s relationship with China by flooding the market with iron ore in a bid to kill off their rivals, including Chinese producers of the commodity.
On the eve of Australia signing a landmark free trade agreement with China, Mr Forrest said he hoped the actions of BHP and Rio did not damage Australia’s strong bilateral relationship with Beijing.
But the billionaire declined to endorse West Australian Premier Colin Barnett’s claim last month that BHP and Rio were acting “in a concert way” and had “some sort of arrangement” by flooding the market with iron ore to drive down the price.
Speaking after Fortescue’s annual meeting in Perth, Mr Forrest said he was “delighted” that the long-awaited FTA with China appeared to be just days away from being signed. But he said BHP and Rio were acting recklessly through their decision to rapidly expand production during a period of weaker demand.
The oversupply in the market has driven down the iron pre price to around $US75 a tonne and hit Fortescue’s share price, which has plummeted by around 35 per cent in the past three months.
“They have said they’re out to restrict the growth of other companies and restrict other opportunities being brought into the marketplace by their competitors,” Mr Forrest said. “To me I think that’s a very fine line to tread when your major customer is one of those people you are trying to shut out of the market.
“I wouldn’t have thought it’s a very customer-friendly policy and I only hope that it doesn’t have any impact on the bilateral relationship with China, which is very strong. No doubt they have their underlying wisdom — they just haven’t shared it with the rest of the market.”
Fortescue chief executive Nev Power said he was relaxed about the free fall in the iron ore price and dismissed analysts’ forecasts of further steep falls. But he admitted he had been surprised by the extent of the fall. Earlier, he told shareholders Fortescue had enjoyed the best year in its 11-year history as the miner ramped up its Pilbara production to beyond 155 million tonnes a year and cut costs. “Your company has had a cracker of a year, and while we are in the middle of a low spot in the market at the moment and there has been something of an overshoot on the supply side, the fundamentals on demand remain strong,” Mr Power said.
Fortescue shareholders yesterday bid farewell to three of its longest-serving directors. Deputy chairman Herb Elliott, a member of the board since 2003, resigned at the end of the meeting, alongside non-executive directors Graeme Rowley and Bud Scruggs.
Fortescue shares closed down 6c at $2.96.
Iron ore floor at $US70: ANZ
BUSINESS SPECTATOR NOVEMBER 14, 2014 7:24AM
analYSTS at ANZ Bank are confident that the sinking iron ore price will find a floor around $US70 a tonne as Chinese mines are forced to close under financial distress.
“Substantial domestic iron ore mine closures would occur between $US70 to $US75 a tonne, creating a floor,” the bank said in a report, according to Bloomberg.
“Opportunistic Chinese steel mill restocking is not occurring at low prices and highlights how difficult near-term steel conditions must be on the ground.”
The comments follow an earlier report this week from ANZ’s head of commodity research, Mark Pervan, that warned the iron ore price may never again clear $US100 a tonne.
Mr Pervan cut the bank’s forecast for 2015 prices to an average of $US78 a tonne, sharply below a previous prediction of $US101 a tonne. The commodity may then rise to an average of $US85 a tonne in 2016 and $US89 a tonne in 2017.
The ANZ report coincided with a sharp reduction in the forecasts of Citigroup, which slashed expectations for the raw material in 2015.
Citi now predicts an average of $US72 a tonne for the first quarter of next year, falling to an average of $US60 a tonne in the third quarter before rising slightly at the end of the year.
The bank also tips a temporary fall into the $US50s at some stage during the third quarter of 2015.
The price of iron ore has slumped 45 per cent this year, setting a new five-year low of $US75.40 on Wednesday this week. It closed the latest session at $US75.50.
The retreat has been driven by rising supply from industry heavyweights Rio Tinto, BHP Billiton and Vale at a time when demand in China has been mixed.
Business Spectator
China traders tip iron ore to sink below $US60
PUBLISHED: 0 HOUR 55 MINUTE AGO | UPDATE: 0 HOUR 34 MINUTE AGO
China traders tip iron ore to sink below $US60
UBS predicts iron ore prices could fall to 2009 levels next year. Photo: Michelle Mossop
AMANDA SAUNDERS
Price squeeze for iron ore juniors
Chinese traders are tipping iron ore will trade below $US60 a tonne next year because domestic property market woes show little sign of abating, a top UBS mining analyst was told.
UBS will not adjust its price forecasts after collecting intelligence during a tour of China last week but says lows not seen since financial year 2009 are possible. Iron ore for delivery to the port of Qinqdao last traded at $US75.47, down 46 per cent since December last year.
UBS mining analyst Glyn Lawcock says talk among steel mills and traders in China is that prices under $US60 a tonne is likely, largely because a weak Chinese property market is expected to persist in 2015.
Last week, Citigroup said it had been “bearish but not bearish enough on iron ore prices, and slashed its forecast for the next two years to $US65 ($75) a tonne, from about $US80. ANZ added fuel to fears for the industry, predicting the commodity is unlikely to breach the $US100 mark again, period.
A Morgan Stanley trip to China earlier this month, cited Chinese traders tipping iron ore will continue its dramatic crash to hit $US70 a tonne by the end of this year.
Intelligence gathered from the UBS tour to China last week found iron ore traders expect a modest rally in the lead up for Christmas, before retreating to a lower average price next year than in 2014.
If property remains weak and additional supply comes on again next year “then we could see iron ore trade lower than current levels with lows not seen since 2008-09 possible”, UBS noted.
The market was flooded with new supply this year but UBS, whose chief commodity analyst is Daniel Morgan, estimates a further 100 million tonnes of fresh supply could be introduced into the market next year, which is likely to weigh on price.
China’s property market will be a defining factor in 2015, after the government announced last month it would remove Home Purchase Restriction and discount mortgage rates for first home buyers, pushing home sales higher in October.
But property developers need to reduce inventory before the property market starts pick up, which would drive increased steel demand, UBS said.
China’s steel production is expected to come in at about 800 million tonnes this year.
In 2007, iron ore was trading at $US36 tonne, before its stratospheric rise to peaks of $US192 a tonne in February 2011.
The Australian Financial Review
Iron ore plunges below $US75 to add to miners’ pain
DANIEL PALMER BUSINESS SPECTATOR NOVEMBER 19, 2014 7:06AM
THE price of key Australian export iron ore has plunged below $US75 a tonne for the first time since 2009, placing intense pressure on a number of mid-tier miners.
At the end of the offshore session overnight, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US72.10 a tonne, down 4.2 per cent from its previous close of $US75.10, in one of its worst days for the year.
The sharp descent is the exclamation point to a three-week slump that has seen it give up more than its October gains after that month’s rebound pointed to the prospect of a recovery after a year-long retreat. The commodity has now seen over 47 per cent wiped off its value in 2015, with last night’s losses bringing back memories of the 8.3 per cent retreat on March 10 that first ushered in the bear market.
Last week, both ANZ and Citi analysts slashed their forecasts for iron ore in the coming years, with ANZ confident that the $US100 a tonne mark will not be seen in the medium-term.
However, while ANZ believes a floor could be reached around the $US70 a tonne level, Citi is confident prices will touch the $US50s at some stage during 2015. On the back of last night the $US70 level should be tested shortly.
The lack of optimism about the commodity stems from continued production expansion from market leaders Rio Tinto, Vale and BHP Billiton as Chinese demand growth stalls. The latter factor, softening demand, was seen as the catalyst for last night’s falls as weak house price data out of China caused concern among investors.
The latest pricing development follows sharp falls in the stock prices of leading iron ore-focused miners yesterday, with Fortescue Metals Group sinking 6.6 per cent, BC Iron plunging 10.3 per cent and Mt Gibson Iron weakening 4.9 per cent. BC Iron is now at a fresh 12-month low, while Fortescue and Mt Gibson are within 2 per cent of their respective 12-month troughs.
The stock weakness also coincides with a note of concern about the financial health of junior miners from ratings agency Standard & Poor’s.
“In our view, junior or mid-size players will be more vulnerable to price volatility while major producers should be in a better position to ride out the price cycle,” S & P said in a recent report, according to The Australian.
Heavyweights BHP and Rio Tinto both lost ground in overnight trade in the UK within a rising market. BHP gave up 0.5 per cent, while Rio lost 1.8 per cent.
It all points to another trying day on the ASX for iron ore producers.
Business Spectator
Unprofitable iron ore miners hammered as price dives
THE AUSTRALIAN NOVEMBER 20, 2014 12:00AM
Barry FitzGerald
Resources Editor
Melbourne
Break-even costsBreak-even costs Source: TheAustralian < PrevNext >
••
FRESH concerns over iron ore demand in China at a time of strong growth in new supplies has pushed prices for the steelmaking raw material to their lowest levels in more than five years, forcing capitulation by investors in listed producers.
The benchmark iron ore price as measured by The Steel Index slumped $US3, or 4 per cent, to $US72.10 a tonne, its lowest level since June 2009, taking the price hit for the calendar year to a painful 46 per cent. The price is now at a level at which all but the three big low-cost producers — Rio Tinto, BHP Billiton and Fortescue — are either generating losses, or are struggling to break even.
Further weakness — as was implied by Asian futures trading yesterday — would also start to raise questions about Fortescue’s earnings capability on an all-in sustaining cost basis.
That has been reflected in the savage attacks on the market values of Fortescue and the industry’s higher-cost producers.
Fortescue has lost more than 53 per cent of its value this year. Atlas has shed 82 per cent, Mount Gibson 62 per cent, and BC Iron 89 per cent.
The share price falls this year for BHP and Rio have been less severe at 13.8 per cent and 14.8 per cent respectively. But the falls represent a combined value hit of $US47 billion ($54bn). Both are diversified, but it has been the severity of the iron ore price fall that accounts for much of the value hit.
Chinese economic data showing that prices had fallen in 67 out of 70 cities was blamed for the latest fall in iron ore prices, with Commonwealth Bank’s commodity desk noting that construction accounts for 50 per cent of China’s steel demand.
“The fall in new home prices in most cities in China prompted base metals lower and exacerbated already weak demand sentiment after data earlier in the week showed Japan’s economy unexpectedly contracted in the third quarter and US industrial production fell in October,’’ the bank said.
It said the ongoing oversupply concerns in response to strong supply from Australia and Brazil was exacerbating weak steel demand in China. “The fall in prices is consistent with expectations amongst Chinese steel mills who are anticipating iron ore to fall under $US70 a tonne in the 2015 first half,’’ the bank said.
“We no longer expect a meaningful iron ore restock later in the year as steel mills in China are content to purchase iron ore at their convenience, either from the port or from domestic producers, due to its wide availability. Tighter credit is also forcing many steel mills to adjust to lower inventory levels.’’
A flood of new capacity from the Pilbara at a time of slowing demand in China has prompted criticism that the major producers are shooting themselves in the foot. But Goldman Sachs said their low-cost expansions made economic sense, even at prices well below spot prices.
“We estimate high-quality brownfield Pilbara debottlenecking generates a 15 per cent internal rate of return at prices below $US50 a tonne,’’ the investment bank said. BHP is likely to make the same “economic sense’’ point at its annual meeting in Adelaide today.
Wes Campbell, senior portfolio manager JCP Investment Partners, has told clients that from a portfolio perspective, the investment manager was happy to maintain its exposure to the lowest-cost producers of iron ore that “stand to benefit from increased volume as they displace higher-cost producers’’.
“We expect that once the iron ore price settles at or around our long-run forecast of $US67 a tonne, the market will then focus on the free cash generation of BHP and Rio.”
Citi recently downgraded its iron ore price expectations to $US65 a tonne for next year and 2016.
“Demand is weak and supply continues to surge, driving high-cost capacity out of the market, but as with other bulk commodities this is happening at a lower than expected price due to barriers to exit, foreign exchange and other factors,’’ the bank said.
Citi also warned that prices could fall as low as $US50 a tonne next year, albeit briefly.
Should its annual average expectation for 2015 of $US65 a tonne come to pass, Australian exports would be worth about $US45bn.
On the 2013 price average, the same exports would have been worth $US94bn.
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