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) per 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) per 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," he said.
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 per 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 per tonne.
All eyes to the scoreboard.
Frequently Asked Questions about this Article…
The iron ore price has been creeping higher since late June and recently traded near US$133.10 (A$144.45) per tonne — a level the article describes as comfortable for most Australian miners. That strength is even more beneficial because the Australian dollar is trading below parity, effectively boosting local returns for exporters.
Executives such as Fortescue boss Nev Power point to persistently low iron ore inventories at Chinese ports, which implies ongoing buying by steel mills. Vale CEO Murilo Ferreira also argued prices are unlikely to fall below US$100 per tonne on a sustained basis. JPMorgan’s recent analysis similarly took a bullish view and downplayed the chance of last year’s crash repeating in 2013.
Yes. UBS commodities analyst Tom Price warned the market could weaken when northern-hemisphere steel mills cut production at the end of summer, forecasting a possible correction around September or October. He even suggested prices could briefly sink to around US$70 per tonne during a panic episode.
Low inventories at Chinese ports tend to support higher iron ore prices because steel mills need to keep buying to feed production. However, UBS argues inventory data is a less clear guide than before because improved supply chains and greater export volumes make delivery more reliable, which can reduce short-term price volatility.
Big increases in export volumes from companies such as Fortescue, Rio Tinto and BHP Billiton have made iron ore more readily available. That increased availability, together with better transport infrastructure in China, has reduced short-term supply anxiety and helped mature the supply chain.
Views are mixed. JPMorgan and industry leaders like Nev Power argue the conditions that caused last year’s crash—very high stocks at mills and ports—are not present now, making a repeat less likely. Conversely, UBS warns of a potential seasonal correction that could still cause a sharp decline.
Steel mills in the northern hemisphere typically reduce production at the end of summer. That seasonal cutback can lower short-term demand for iron ore and, according to UBS, may trigger a price correction around September or October if mills reduce buying significantly.
Investors should track the spot iron ore price per tonne, Chinese port and mill inventory levels, export volumes from major miners (Fortescue, Rio Tinto, BHP Billiton), seasonal production patterns at steel mills, and currency moves (AUD vs USD). Also monitor analyst views mentioned in the article — for example JPMorgan’s bullish outlook and UBS’s warning of a possible correction.
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