MARKETS SPECTATOR: Chinese iron craving

It’s no surprise that the spot price for iron ore fixed in Tainjin, China, has risen 5.6 per cent in the last two days, says Grange Resources’ new managing director Wayne Bould.

He says this is because Chinese steel mills are restocking their iron ore inventory, which had fallen to 15 to 20 days’ supply from as high as 35 days.

“The stockpile has decreased so the replenishment rate will increase to normalised rates,” Bould told Markets Spectator.

“China can slow things up incredibly quickly and turn things up just as quickly.”

He is “hopeful” the spot iron ore price will increase to $US130 a tonne. Grange Resources sells 1 million tonnes a year of iron ore magnetite pellets to closely held Chinese steelmaker Jiangsu Shagang Group at an undisclosed contract price, and 1.2 million tonnes to a company that successfully bids for Grange’s iron ore based on a spot price. About 90 per cent of Grange’s iron ore is sold to China, with the rest sold to Japanese steelmakers.

In the three months to March 31 Grange’s iron ore fetched an average price of $US144.71 a tonne free on board. It has slipped since then to about $US140 a tonne FOB, says Bould.

Yesterday, the Tianjin iron ore spot price rose $US4.70, or 4.2 per cent, to $US116.60 bringing its two-day gain to 5.6 per cent, according to Bloomberg data.

Grange is able to get a higher price for its iron ore than the spot market because its iron content, at 65.5 per cent, is higher than the Tianjin iron ore spot market iron content at 62 per cent. The company has fewer impurities in its iron ore than other producers, Bould says. 

Grange has “had a good look at its business” in the last 12 months. The company has flagged “a tight period of iron ore production and sales in Australia in the next few years”. It has closed its Perth office as this was an additional cost burden, and it's also put on hold plans to develop its Western Australian Southdown iron ore deposit until the company can find an equity partner for the project, says Bould.

“The project finance market in Australia is bad,” he says.   

Grange will concentrate on trying to boost its Savage River production in north-west Tasmania to 2.9 million tonnes a year “in the next two years” from the current 2.5 million tonnes per year. Gould says the company has to become more efficient as Port Latta can only accept ships of up 82,000 deadweight tonnes, putting it at a considerable disadvantage to competitors who can load ships of up to 400,000 DWT. 

At 1304 AEST Grange shares were unchanged at 19.5 cents against a benchmark S&P/ASX200 index fall of 1.2 per cent. 

Grange’s shares have fallen 61 per cent in the last 12 months, compared with the 20 per cent gain in the S&P/ASX200 index.