Iron Ore Price - Where to?
Posted: 29/04/2015 5:00:00 AM
Mining Oil and Gas Jobs
Filed under: Oil-and-gas
Iron ore rose to its highest level since March last night at $US59.09, and is now up 25 per cent for the month.
The rise, which follows BHP Billiton's decision last week to slow the pace of its $US2 billion expansion plan in the Pilbara, comes after the iron ore price suffered its largest quarterly loss since 2009 in the three months through March and fell to a decade-low of $US47.08 a tonne earlier this month. Steel demand in China was down 5 per cent year-on-year during the March quarter.
The biggest question facing the industry is whether BHP's slowdown will be matched by Rio, Gina Rinehart's Roy Hill project or Vale, which is halfway through a $US19 billion expansion in Northern Brazil. The opinions were as follows:
Analyst Adrian Prendergast said Chinese PMI data on Thursday and the publishing of Chinese iron ore stockpile data on Friday were likely to provide two negative indicators for iron ore before the end of the week. Mr Prendergast said he did not expect the current "short-covering rally" to turn into a larger recovery for the sector.
"Fundamentally we have not seen any improvement in the iron ore market, and the spot market is so illiquid a short rally is easy to occur. We need to see demand-linked data improve (or at least stop getting worse) in the Chinese steel industry for us to gain any confidence in the current rally. Good volatility for traders, but no change in fundamentals,"
"Time will tell whether this transpires to be a temporary short-covering rally or something more significant,"
Ric Spooner, chief market analyst at CMC Markets, said in a note. "However, even if the spot iron ore price does not sustain large gains from current levels, markets are adjusting to an increased possibility of it forming a base in the $US50 range."
Goldman Sachs' analyst team led by Eugene King believes the iron ore landscape is scarcely changed by recent events, and the familiar dynamic of rising supply amid weak demand will quickly resume.
In a note to clients, the Goldman Sachs team said it expects BHP, Rio and Vale to continue with their existing expansions, and noted that new mines owned by Anglo American and Rinehart's Roy Hill joint venture were about ramp up significantly.
"We don't expect any of the major iron ore producers to alter plans. The capex has largely been spent and the internal rates of return of delivering the production into the infrastructure, even at sub-$US50-per-tonne prices, is very compelling,"
the analysts said.
"We expect a significant acceleration in iron ore production run-rate in the second half of 2015. With 2015 year-on-year steel demand in China running at negative 5 per cent for the first quarter, the combination of more low-cost iron ore production meeting weaker demand will see lower iron ore prices throughout 2015 in our view."
PIMCO's managing director for Australia, Robert Mead, says the iron ore price has fallen below its natural "floor".
"The view that we've taken is that iron ore should have a fairly strong floor around $US60 once you get through this period of volatility – and that really relates to the cost curve on the supply side,"
he said on Thursday.
"Somewhere in that low-$US60 range is where we think the iron ore price will settle."
The World Bank believes iron ore will lead declines among metals this year as the biggest producers in Australia and Brazil expand low-cost supplies further while demand remains weak.
The raw material will average $US63 a metric ton this year, the Washington-based lender said in its quarterly commodities report on Wednesday. That compares with the estimate of $US75 given in the bank's January's report. The forecast for 2016 was cut to $US66.60 from $US77.90.
Analyst Ian Roper says ore will average $US55 a ton in the third quarter. There'll be no net growth in supply in 2015, down from a forecast in September for an additional 94 million metric tons and a February outlook for an extra 50 million tons, Roper said in an April 21 report.
Australia & New Zealand Banking Group
"Prices will remain under pressure in the second quarter but a floor may be forming as the large low-cost producers rethink investment in the current weak market,"
ANZ said in a report on Thursday.
While there are signs supply is adjusting, it's not fast enough to rebalance the market, Justin Smirk, a senior economist at Westpac Banking Corp in Sydney, said in a report. Supply has to fall short of demand to invoke firmer prices, he wrote.
Australia's richest woman, Gina Rinehart, last week said prices could be low for some time amid a supply glut.
"The ore price could be down for quite some time,"
according to Mrs Rinehart,.
"Will it be down forever? Of course not."