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  • Iron Ore Prices To Rebound On China Imports 2 comments
    Aug 22, 2012 2:48 PM | about stocks: RIO, VALE, BHP, FSUMF

    This article appeared in Bloomberg today - 22 August 2012

    Originating Author: Helen Yuan in Shanghai

    By Bloomberg News - Aug 22, 2012 1:53 PM ET

    A plunge in iron ore prices and shipping costs means it's cheaper for Chinese steel mills to buy the material from Brazil more than 8,000 nautical miles away than to buy the lower-grade ore being dug in their own backyard.

    China's iron ore output had the steepest decline in July in four years, signaling the world's largest metals consumer is poised to boost purchases from producers such as Brazil's Vale SA and Rio Tinto Group. Stronger demand may push iron ore higher, with the spot price set to gain as much as 41 percent in the fourth quarter after touching a near-three-year low today, according to estimates compiled by Bloomberg.

    BHP Billiton Ltd.'s iron ore operations at Port Hedland in the Pilbara region of Western Australia. BHP, the world's biggest mining company and third-biggest ore shipper, is forecast to today report a 38 percent drop in earnings to $14.6 billion in the year ended June 30, according to the average of eight analyst estimates compiled by Bloomberg. Source: BHP Billiton Ltd. via Bloomberg

    "We're using almost all imported ore to feed our furnaces now as prices have become more appealing," Wang Liancheng, an international trading manager of Hebei Tianzhu Iron & Steel (Group) Co., said by phone from Tangshan. The company, which used to buy a quarter of its needs domestically, has switched to ore from South Africa, Australia and Brazil, he said.

    China's Premier Wen Jiabao is overseeing $23 billion of investment in new mills to stimulate auto-making and housing, which will boost demand for iron ore and help revive the nation's flagging economy, which grew at the slowest pace since 2009 in the second quarter.

    Ore prices may rebound as soon as next month because of declining stockpiles in China and the nation's rising demand for construction, Vale, the world's largest iron-ore producer, said this month.

    Shipping Costs

    Australian ore for immediate delivery at Chinese ports traded yesterday at about 780 yuan ($133) a dry ton, including taxes and port storage fees, with ore from Brazil at 790 yuan, according to researcher Mysteel.com. That compares to 1,030 yuan a dry ton of ore concentrates asked by domestic miners, according to Mysteel.

    China's ore contains about 20 percent iron, compared with more than 55 percent iron in Australian ore, making it more expensive to extract, Deutsche Bank AG estimates. Brazil is three times as far from Asian markets as Australia, where Rio Tinto, BHP Billiton Ltd. and Fortescue Metals Group Ltd. produce the bulk of their metal.

    BHP, the world's biggest mining company and third-biggest ore shipper, today reported a 35 percent drop in earnings to $15.4 billion in the year ended June 30 because of falling commodity prices. The result beat the $14.6 billion average of eight analyst estimates compiled by Bloomberg.

    The company said it's selling every cargo of iron produced. Chief Executive Officer Marius Kloppers said he doesn't see a "dramatic" upside to its price.

    The benchmark Baltic Dry Index, a broad measure of shipping costs, has plunged 67 percent from October, the highest level in the past year. It takes about 40 days to ship ore from Brazil to Chinese ports and two weeks from Australia's Pilbara region.

    Building Stockpiles

    The 62 percent iron ore arriving China's Tianjin port, an industry benchmark that touched a new annual low today of $104.70 a ton, may increase to $148 a ton in the fourth quarter, according to the median of seven analyst estimates compiled by Bloomberg.

    Traders also build iron ore stockpiles in the fourth quarter because freezing weather disrupts ports in the winter months, according to Steve Rodley, London-based managing director of Global Maritime Investments Ltd., which operates 64 ships.

    Increasing exports to Chinese mills will help revive earnings at Vale and Rio, the top exporters of the raw material, who both reported in the past month a decline in profit. Rio's net income may almost double to $11.4 billion this year, according to the average of 17 analyst estimates compiled by Bloomberg.

    Record Production

    Monthly steel production in China rose to a record 61.7 million metric tons in July, according to government data.

    "There is no obvious failure in the industrial activity of Asia's steel industry," UBS AG analysts led by Tom Price said in an Aug. 20 report. "We should therefore expect a typical seasonal lift in ore prices in the fourth quarter, returning spot fines to levels above $125."

    Iron ore prices have to stay under $130 for several weeks before Chinese mines shut down, according to Carlos de Alba, an analyst at Morgan Stanley in New York. They declined below that level on July 17. Production costs in China are about $140 a ton, based on iron content, Credit Suisse Group AG said in July.

    Iron ore output dropped 8.1 percent in July to 115.5 million metric tons in China, according to the National Bureau of Statistics. That's the biggest decline in July since 2008, according to seasonally adjusted data compiled by Bloomberg.

    Still, iron ore prices may fall further to around $100 a ton in the near term, according to Mysteel.com. Chinese steel mills, overwhelmed by rising capacity and sluggish demand, have struggled to remain profitable as prices for the alloy plunged to an almost three-year low this month.

    Price Forecast

    "There's still room for imported prices to fall, while domestic mines are already struggling to stay profitable," Hebei Tianzhu's Wang said.

    China's iron ore imports totaled 57.87 million tons in July, 6.1 percent higher than a year earlier. Major Chinese steelmakers including Baoshan Iron & Steel Co., posted a combined 96 percent drop in first-half earnings, the China Iron and Steel Association said July 31.

    "Mines in China's coastal regions and in the southwestern areas are most hit by the falling prices," said Mysteel's Shanghai-based analyst Shi Zhenglei. "Mills along the coast stopped buying domestic ore, and falling ore prices also drained demand for shipping the raw material from mines in the faraway Xinjiang and Inner Mongolia."

    Chinese production could be curtailed by as much as 20 percent in August with up to 30 percent of mines losing money, Barclays Plc analysts led by Leonardo Correa said in an Aug. 20 report. They expect iron ore to trade at $120 to $130 a ton as mills restock and as seaborne material purchases gain.

    "Chinese mills are out of the market to preserve cash amid tough market conditions in the steel industry, but the trend of destocking is unsustainable," the analysts said. "The return of mills to the market should be supportive for prices."

    To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

    Disclosure: I am long BHP.

    Additional disclosure: This article is shared article from Bloomberg.com

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  • Peter Epstein
    , contributor
    Comments (1761) | Send Message
     
    RIO DE JANEIRO--Spot market iron-ore prices fell again Wednesday despite news that steel production in China, the biggest iron-ore-consuming nation, continued to rise in early August. The price for iron ore fines, a standard industry product, with 62% iron content slid to $104 a metric ton for delivery into China, London price provider the Steel Index, or TSI, reported. This was down from $106 on Tuesday, and was the lowest since December 2009, when the market slumped due to the global economic crisis.

     

    Chinese steel output--normally considered the barometer for ore prices--rose 1.05% on an average daily basis, however, in the first 10 days of August, according to Chinese data.
    Iron-ore spot market prices have declined consistently in recent weeks, from a 2012 peak of $149 a ton in April, because of high inventories of the steelmaking raw material at Chinese steel mills, some of which are taking advantage of slower steel market growth to carry out maintenance stops.

     

    World steel output has declined in two of the last three months, mainly because of lower European production, while iron-ore output has grown in Australia and Brazil, the two major exporting nations, following climatic problems that curbed production early in the year.
    "There's more supply than demand," said Cinthia Rodrigues, economic data manager at Brazilian mining institute Ibram. "There's capacity coming on stream which may not be viable at current price levels."

     

    Analysts and directors of Brazilian mining company Vale SA (VALE, VALE5.BR) said in May they viewed $120 a ton as a "floor" for spot iron-ore prices as some Chinese mining companies are unable to produce profitably at below that price level. In addition to higher exports from Australia, Brazil, other Latin American countries and Africa, the lifting of a ban on iron-ore production from Karnataka in India, which typically increases its ore exports after the monsoon season, has also played a role in pricing, Barclays Capital said in a research report Wednesday.

     

    The change in Indian strategy with the Karnataka restart poses a "medium-term supply risk," which is cutting into margins, according to Barclays analyst Leonardo Correa. A dose of negative sentiment, stemming from concerns over Chinese economic growth and the European crisis, has also weighed heavily on ore prices, which have sunk to below analysts' expectations.

     

    The soft European steel market is a factor in market attitude, as well as Chinese steel coil export prices, which recently collapsed to a 30-month low, according to TSI steel analyst Vaseem Karbhari. The analyst noted in a recent report that European steel coil prices have been declining since April and the current situation is exacerbated by the holiday season, but that "an August recovery seems unlikely."
    Ibram's Ms. Rodrigues said the current weakness in the iron-ore market "is more than anything a reflection of the European crisis."

     

    Ms. Rodrigues noted, however, that market analysts haven't yet revised downward their expectations for average annual spot iron-ore prices of around $150 to $160 a ton this year, which indicates prices are expected to recover. "We could see an upturn in 30 to 40 days, especially if we get positive economic news from Europe," she said.

     

    Vale said in an emailed statement Wednesday it expects ore prices to improve in September.
    Iron-ore prices plunged from a peak of $181 a ton in early September 2011 after the government in China, which consumes over 60% of the world's entire iron-ore supplies, introduced measures to curb credit amid inflationary fears as the property market overheated. This put "an enormous brake" on the construction industry, directly affecting the steel and iron-ore sectors, Goldman Sachs analyst Marcelo Aguiar said in May.

     

    This year's average iron-ore price will work out to be lower than the $168 a ton seen in 2011, TSI said.
    22 Aug 2012, 04:11 PM Reply Like
  • Colin Lea
    , contributor
    Comments (578) | Send Message
     
    Author’s reply » Thanks for the link Peter, appreciate the additional info.
    Regards, Col
    22 Aug 2012, 04:45 PM Reply Like
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