Bear market and Iron ore outlook longer-term $80 a12/11/11
The price of iron ore delivered to Chinese ports is 25%or more down since September and still under pressure, which is a signalthat the world's economy may be heading for a severe recession.
Theiron ore bubble has burst. And so too have those of copper andmetallurgical coal. For some years China has been the largest importer,taking as much as half of the world's iron ore exports. Those shipmentshave been the main driver of prices for almost a decade.
Accordingto commodities consultancy IndexMundi, in October 2001 Chinese buyerswere paying just shy of $13 a ton for 62% iron ore fines delivered toTianjin port. In August and September this year the average price wasmore than $177 a ton - almost 14 times higher in a decade. That was afar better relative performance than, to cite two examples, "safe-haven"gold or Brent crude oil.
But, as global economic fears mounted,by October this year the average was down to little more than $150 aton. Latest quotes are in the region of $134 a ton delivered to theChinese port, where stockpiles are mounting because steelmakers aredeferring deliveries.
To make matters worse, according to talk inHong Kong, some Chinese buyers are now arbitrarily responding to thecommodity's price collapse by reneging on purchase contracts signed onlya month or two back at higher prices.
Just two years ago theexport market was less volatile. Back then, the major iron ore producers- Rio Tinto, Vale and BHPBilliton - would agree prices annually withtheir customers. But that changed, in part under pressure from theChinese steelmakers, and prices are now set quarterly at most.
Spotprices now respond far more quickly and dramatically to changingeconomic conditions. Rio has gone further, with CEO Tom Albanese sayingthat falling prices will help accelerate the shift to shorter-termpricing. Some sales prices are already being set on a monthly basis.
Someminers are putting a brave face on things. This past week FortescueMetals, Australia's third-largest iron ore producer, admitted thatthough it had recently seen prices as low as $115 a ton, they were nowback up to $131 a ton. Fortescue added that it was confident Chinesedemand would grow and that prices would improve. Maybe, maybe not.
Fortescue'sprognosis came after its founder, Andrew Forrest, had been reported assaying that a "sensible" longer-term level would be $80 to $100 a ton.Vale has been reporting recent levels of $120 a ton. And Australia'sAtlas Iron, which is among the many miners busily expanding, has beenpredicting a range of $120 to $140 a ton for the next three years.
Thethree majors are pushing ahead with expansion projects in response torising prices. So, too, is Kumba in South Africa. No one is talking ofproduction cuts - quite the opposite. Ukraine's Ferrexpo noted that withproduction cash costs of something over $50 a ton it can maintainprofitable production should prices fall even further.
And, overthe past three or four years, strong prices have contributed to a greatdeal more new production across the globe. Sierra Leone, to give a minorexample, has just re-entered the export market after an absence of 30years.
The fact remains that demand for steel remains affected byfebrile demand for consumer products such as motor vehicles. That is indeveloped economies as well as in the booming Chinese market whereconsumers are feeling the pinch of tighter credit and Beijing'sinflation-fighting interest rate increases.
It remains an openquestion as to whether the Chinese economy is in for the "hard landing"being predicted by, amongst others, influential economist NourielRoubini or "Doctor Doom", as he has been called.
Elsewhere, ifthe eurozone countries tumble into real recession by failing to dealwith the problems of debt-crippled Greece and Italy, can the rest of theworld be far behind? The straws are already in the wind.
https://www.businesslive.co.za/southafrica/sa_markets/2011/11/12/falling-iron-ore-prices-foreshadow-a-recession