Miners hit as iron ore rally comes to grinding halt
December's 38 per cent rise in the iron ore price has begun to reverse over the past week, and the retreat accelerated on Thursday when the price slumped by 5 per cent in a single day.
The slump to $US145.40 a tonne was reportedly the commodity's biggest single-day fall in more than a year, and it took its toll on Australia's iron ore exporters.
Fortescue Metals bore the brunt of investor angst, closing 19¢ lower at $4.38, while its Pilbara neighbour Rio Tinto shed 95¢ to close at $64.60.
Atlas Iron lost 6¢ to $1.55, BC Iron was down 10¢ to $3.40, while Arrium shed 2¢ to close at 92¢.
All those stocks are now between 7 and 20 per cent lower than they were just a fortnight ago, but investors can take comfort from the fact that all are dramatically higher than they were in September, when the iron ore price sank to a market-shaking $US86 a tonne.
BHP Billiton, the iron ore exporter with the most diversification to buffer its exposure, was the exception, with shares closing 9¢ higher at $36.34.
UBS analyst Daniel Morgan said the iron ore produced by Chinese domestic suppliers had not risen in price as much as iron ore from exporting nations such as Australia over recent months, and the softening over the past week was probably a sign that the gap had become big enough to lure customers to buy from Chinese domestic suppliers for a while. "We think the price ran ahead a bit too hard, and we had expected it to come back," he said.
Mr Morgan said it was common to see customers stock up through December ahead of the northern winter and Australia's cyclone season. He said investors should not get too swayed by daily fluctuations in the iron ore price, given it represents only a small number of transactions each day.
"It's not a large amount of boats [arriving into China] on a daily basis that price the trade, and individual trades up or down can move it a bit and that's what we've seen recently," he said.
"Looking back over recent weeks, the price has been characterised by big jumps, so you've seen the iron ore price move up by a few bucks a day, and [Thursday's] move is a reversal of that. Daily moves can be volatile, so we look at trends."
Only small amounts of iron ore are sold at the spot price, but the monthly or quarterly average of the spot price typically helps to set the prices at which the likes of Rio and Fortescue sell ore.
UBS is forecasting the benchmark iron ore price to average $US131 a tonne in the first quarter of 2013 and lift to $US133 in the second quarter. But as Fortescue and Rio bring more volumes of iron ore into the market, UBS expects the price to soften to $US123 a tonne and $US118 a tonne in the third and fourth quarters.
Frequently Asked Questions about this Article…
The benchmark iron ore price reversed after a month-long rally, falling sharply — including a 5% one-day drop to US$145.40 a tonne, reportedly the biggest single-day fall in over a year. That decline weighed on Australian iron-ore exporters because lower spot prices can reduce near-term revenue expectations and knock share prices of companies exposed to iron ore.
Several miners fell: Fortescue Metals closed 19¢ lower at $4.38, Rio Tinto shed 95¢ to $64.60, Atlas Iron lost 6¢ to $1.55, BC Iron fell 10¢ to $3.40, and Arrium eased 2¢ to 92¢. BHP Billiton bucked the trend and was up 9¢ at $36.34, likely reflecting its greater business diversification.
Yes. Although many stocks are now 7–20% lower than they were a fortnight earlier, the article notes they remain dramatically higher than in September, when the iron ore price plunged to about US$86 a tonne.
UBS analyst Daniel Morgan said short-term moves can be driven by a relatively small number of daily trades and that daily volatility is common. He suggested investors focus on trends rather than getting too swayed by day-to-day fluctuations, since only small volumes are sold at the spot price each day.
Only small amounts are sold at the spot price daily, but monthly or quarterly averages of the spot price typically help set the contract prices that major exporters such as Rio and Fortescue use when selling ore.
UBS and the article point to a widening price gap between imported Australian ore and cheaper Chinese domestic supplies. That gap likely encouraged buyers to switch to domestic material, and some analysts say the December rally ran ahead of fundamentals, so a partial reversal was expected.
UBS forecast the benchmark iron ore price to average US$131 a tonne in Q1 2013 and US$133 in Q2, then soften to about US$123 in Q3 and US$118 in Q4. UBS expects prices to weaken as Fortescue and Rio bring more volumes to the market.
The article suggests no. Analysts say daily moves can be volatile and driven by limited trades, and investors can take comfort that share prices are still well above September lows. Still, the drop highlights commodity risk for heavily exposed miners and the importance of considering diversification and longer-term trends.
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