Tuesday 22 January 2013

Iron Ore’s ‘Unsustainable’ Rally Seen Ending as Supply Gains

By Phoebe Sedgman - Jan 22, 2013
Bloomberg
Iron ore may tumble 21 percent by the year-end as global supply increases, undermining a rally that pushed the price of the steel-making raw material to the highest level in 15 months, according to Bank of America Corp.

The commodity may fall to $110 a ton by the end of the year from $140 a ton in the first quarter, the bank said in a report dated yesterday. Ore with 62 percent iron content delivered to the Chinese port of Tianjin rose 0.6 percent to $145.90 a dry ton yesterday, according to data from The Steel Index Ltd.

Bank of America’s outlook tallies with forecasts this month from Deutsche Bank AG and JPMorgan Chase & Co. that prices are poised to retreat in the second half as supply gains. Iron ore has surged 68 percent since slumping to a three-year low in September as growth in China, the biggest buyer, accelerated for the first time in two years and mills restocked inventories.

“The recent price rally is unsustainable and should come off in the second half of the year as more supply begins to come on line,” Bank of America said. Prices will “remain supported over the winter due to seasonal factors,” it said.

China’s coldest winter in 28 years curbed its domestic production of iron ore, according to a Jan. 10 report from Credit Suisse Group AG. Imports rose to a record 70.94 million tons last month, customs data show. The world’s second-largest economy buys about 65 percent of seaborne trade.

New Supply

Deutsche Bank said on Jan. 8 that prices will drop below $120 in the second half from about $170 in the first six months, predicting that the theme of 2013 may be “a tale of two halves.” Prices will drop from an average $145 a ton in the first quarter to $120 a ton in the fourth quarter as new supply comes on stream, JPMorgan Chase said on Jan. 16.

Global seaborne supply may gain 7 percent in 2013 from a year earlier, according to Deutsche Bank, which said Australian shipments may climb 14 percent and Brazilian exports may increase 12 percent. Rio Tinto Group (RIO), the second-largest mining company, said on Jan. 15 its expansion in the Pilbara to 290 million tons by the year-end is on track, with output set to rise to 360 million tons by the first half of 2015.

“There are new mines coming on, especially toward the end of the year, so we might see some weakness there,” Hsi Han Pin, global head of commodities research at Standard Chartered Plc, said in an interview in Seoul today after a briefing. “But are we seeing iron ore prices trending downwards, say, below $100? No, we are not.”

Largest Steelmaker

Baoshan Iron & Steel Co. (600019), China’s largest steelmaker, said today it raised prices for hot-rolled products and most cold- rolled products by 200 yuan ($32) a ton for March delivery. China’s economic growth accelerated in the final quarter of 2012, data showed on Jan. 18, as government efforts to revive demand drove a rebound in industrial output and retail sales. Gross domestic product expanded 7.9 percent in the three months.

Goldman Sachs Group Inc. is more bullish on iron ore, predicting another year of “exceptional prices,” according to a Jan. 16 report that increased its full-year forecast to $144 a ton from $140. While the global market is set for oversupply, that’s two years away, Goldman said.

Ore in Tianjin rallied to $158.50 on Jan. 8, the most expensive since October 2011. Last year, the price advanced 4.6 percent after slumping 19 percent the previous year.

Inventories held at Chinese ports fell 4.4 percent to 69.71 million tons on Jan. 18, the lowest level since September 2010, according to data from Beijing Antaike Information Development Co. The holdings dropped 24 percent in the final quarter of 2012, the biggest decline since at least the third quarter of 2006.

The spike in iron ore prices is likely to be temporary, the Australian newspaper reported Jan. 3, citing Sam Walsh, then Rio’s head of iron ore. Walsh was named on Jan. 17 as the company’s new chief executive officer, replacing Tom Albanese.

Iron ore is measured in dry tons, or metric tons less moisture. At Tianjin port moisture can account for 8 percent to 10 percent of the ore’s weight.

Australia and Brazil are the two biggest exporters and accounted for about 73 percent of world seaborne supply in 2012, according to Credit Suisse.

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