Investors are bracing, but iron ore price stays steady
This time last year, the iron ore price had already begun its terrifying descent towards a September low of $US86.70 ($94.10) a tonne, a price that prompted more than a few Australian miners to contemplate their existence.
Similar turbulence was expected in the third quarter of this year, but so far there's been no sign of weakness. The iron ore price has been creeping higher since late June, and spent most of last week in a positive trajectory towards $US133.10 ($144.45) a tonne; a very comfortable price for most Australian miners, made even better by the local currency trading well below parity.
The unexpected strength of the price is emboldening the miners, who have started to question whether there will be any spring slump in 2013.
Fortescue Metals Group boss Nev Power last week pointed to data that measures the amount of spare iron ore that sits at Chinese ports as further evidence that the price should remain strong for a while at least.
The data shows iron ore inventories in China have been quite low for many months now, implying that buying will need to continue to feed the steel mills.
"We don't see the same environment that created last year's drop," said Mr Power at the Diggers n' Dealers conference in Kalgoorlie.
"There were very high stocks in both the steel mills and the ports last year, and this year we are seeing below average port and mill stocks."
Over in Brazil, the world's biggest iron ore exporter, Vale, was also taunting the iron ore bears, with chief executive Murilo Ferreira predicting iron ore would not fall below $US100 a tonne on a sustained basis.
"China has once more proved the pessimists wrong ... our view related to China continues positive," he said.
The arguments both fit with a bullish view of iron ore that JPMorgan recently published, that effectively dismissed the likelihood of last year's price crash repeating in 2013.
But not everyone is jumping on the bandwagon. UBS commodities analyst Tom Price has some sobering thoughts on the iron ore sector and Australia's Treasury Department, which counts on iron ore to be the nation's most lucrative export earner.
Mr Price said inventory data was no longer the clear guide for the iron ore price it once was, because steel mills were more confident in the delivery of iron ore.
Big increases in export volumes by the likes of Fortescue, Rio Tinto and BHP Billiton meant iron ore was more easily available and transport infrastructure within China had also improved to get the iron ore to the mills quickly.
"Supply chains are maturing and, as a result, the anxiety about short-term supply is passing.
"That in turn tends to reduce price volatility and the urgency around restocking over a short period of time," Mr Price said. "The fact is we've actually gone through most of this year with very low inventories."
Mr Price said the iron ore price would soon begin to suffer as steel mills began their seasonal habit of reducing production at the end of the northern summer, and that meant another big iron ore price crash could be imminent.
"The iron ore prices will weaken and we are still expecting a correction event around September or October on that basis," he said.
For a few panicked days between now and the end of October, Mr Price believes the price could sink even lower than last year's nadir and hit $US70 a tonne.
All eyes to the scoreboard.
Frequently Asked Questions about this Article…
The article says the iron ore price has been creeping higher and recently traded around US$133.10 a tonne (about A$144.45). By contrast, this time last year the market fell to a September low of US$86.70 a tonne (around A$94.10).
Miners are encouraged because the iron ore price is at a level that is comfortable for most Australian producers, and the local currency is trading well below parity, improving returns. Fortescue's CEO also pointed to low iron ore inventories at Chinese ports and mills, which implies continued buying by steelmakers.
Fortescue Metals Group chief Nev Power noted that Chinese port and mill inventories have been quite low for many months, suggesting steel mills need to keep buying. He said conditions that caused last year's crash aren’t present this year, supporting a stronger iron ore outlook.
Vale chief executive Murilo Ferreira said he did not expect iron ore to fall below US$100 a tonne on a sustained basis, arguing that China’s demand had proven pessimists wrong and keeping his view on China positive.
According to the article, JPMorgan published a bullish view that effectively dismissed the likelihood of last year’s price crash repeating in the current year, supporting the idea that the market may remain stronger.
UBS commodities analyst Tom Price warned that inventory data is no longer the clear guide it once was because supply chains and deliveries have improved. He noted big export volume increases from miners such as Fortescue, Rio Tinto and BHP Billiton, and warned that seasonal steel mill production cuts around the end of the northern summer could trigger a price correction around September or October — possibly even a brief fall toward US$70 a tonne.
Yes. The article highlights mixed signals: low Chinese port and mill stocks suggest continued demand, while UBS points out that improved supply chains and larger exports have reduced short-term supply anxiety and could dampen volatility. Investors should note both the low inventory picture and the growing availability from major exporters.
The article suggests watching Chinese port and mill inventories, seasonal production patterns at steel mills (especially around the end of the northern summer), export volumes from big miners like Fortescue, Rio Tinto and BHP Billiton, and the AUD–USD exchange rate — all of which can influence iron ore prices and Australian miners’ profitability.
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