Wednesday, 28 March 2012 |
The rate of China's iron ore demand has peaked but a strong investment case remains for the crucial steel making commodity, said Morgan Stanley's global metals chief economist on Tuesday.
"This is a story which we think still has legs," Peter Richardson told a conference in Sydney.
Even though the growth rate of iron ore demand from the world's second-biggest economy has likely peaked, the sheer size of China's requirement means the market will remain imbalanced until 2014 at least, he said.
"Of course this is the law of large numbers," Richardson said. "A 3% year-on-year increase or 4% increase on a steel production base of 683 million tons still requires, we think, close to 40 million-50 million tons more iron ore this year alone than last year."
Shares in big mining companies including BHP Billiton Ltd. (BHP.AU) and Rio Tinto Ltd. (RIO.AU) have taken a hit since early last week following comments from key executives that China's demand for iron ore is flattening out. Concerns over China's market for the commodity also sent the Australian dollar sharply lower.
Adding to his bullish investment case, Richardson said the deteriorating quality of iron ore mined in China is helping to sustain demand for imports, with today's average ore grade in China of about 17-18% much lower than 33% six years ago. Widening restrictions on Indian iron ore exports will mean Australia and Brazil will increasingly have to take up the slack, he said.
Releasing an update Tuesday to its outlook for global metals prices, Morgan Stanley reduced its 2012 iron ore price estimate by 3% to US$151 per metric ton, down from US$156. It left its forecasts for 2013 and 2014 unchanged at US$160 and US$140 a ton respectively. Prices are then expected to tail off to US$125 in 2015, falling to US$110 in 2016 and US$105 in 2017. It's long term price forecast is unchanged at US$99.
The U.S.-based investment bank has a different view on metallurgical coal, another key ingredient in the steel making process. It remains bearish on prices due to rising production in China and signs of a normalization of Australian exports following floods.
Morgan Stanley cut its hard coking coal forecasts for 2012 and 2013 each by 6% to US$207 a ton and US$202 respectively.
It has increased its 2012 weighted average price for base metals by 2.01% and lists copper and tin as its top picks, upping its 2012 price forecasts for those metals by 3% and 11% respectively. Lead and zinc are its least favoured and it cut its 2012, 2013 and 2014 aluminium price forecast by 7% each year.
"Commodity markets continue to confront uncertainties about the global growth outlook while a stronger U.S. dollar is proving to be a headwind for the asset class, as expected," Richardson said in Morgan Stanley's Global Metals Playbook for 2012.
"However, supply constraints remain supportive in our favoured exposures - copper, tin, gold and iron ore."
Morgan Stanley nudged down its 2012 gold price forecast to US$1,825.00 per fine ounce, still much higher than Monday's close of US$1,685.60. It's bullish case is built on negative real interest rates and the prospect of further unconventional monetary policy in the U.S. and Europe.
Source: Dow Jones
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