MARKETS SPECTATOR: Pinning down the iron ore price

UBS has tried to paint some context around iron ore's volatile spot price, citing the effects of trader sentiment and seasonal restocking in China as key factors.

There’s no doubting the iron ore price roller-coaster ride hasn’t been for the faint-hearted.

Volatility continues to be the name of the game with spot prices rallying more than 80 per cent from the September 2012 lows of $US86 per tonne.

Prices have now drifted about 10 per cent in the last week to around the $US145 per tonne level.

In trying to understand the forces at play, UBS has described the recent rally as a trader-led event that’s reflecting a sharp improvement in sentiment across Asia, surprise buying from Chinese steel mills and a weak supply-side response.

"Investors are confused: where to from here? A reasonable guide for spot prices is their recent history. Since the demise of ‘benchmark’ in 2010, spot signals have reported trader-led lifts at the start of each calendar year; prices then tend to adhere to a trading range during seasonal restocking (November-May). What’s a reasonable range for 2013? Post-spike, we’re thinking $120 to $150 per tonne FOB (free on board) or ($US130 to $160 per tonne cost and freight {shipping}),” UBS said in a report.

UBS’s forecasts remain unchanged but now come with some upside risk. Their forecasts assume short-term activity in China’s key steel-intensive property and infrastructure sectors to remain subdued. Clearly, given the recent pick-up in Chinese economic data, there is risk to these assumptions.

In terms of equity exposure, UBS likes Rio Tinto and Fortescue during restocking and spot price buoyancy events. It sees Rio as the low-cost, high volume iron ore exposure while noting that Fortescue is the largest, most leveraged iron ore pure-play.

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