Iron Ore Continues To Be Strong Going Into 2013

by: Emerging Money

By Tim Seymour

Iron ore has run from $86 per ton to $122 per ton, with expectations that prices will hold at this elevated level. Senior resource analyst at Mine Life Pty in Sydney Gavin Wendt told Bloomberg Network that "prices will stay about where they are now until 2013."

The Street never priced in $86 a ton, but the markets did. There is more to this trade despite the decent bounce in iron ore players like Rio Tinto (NYSE:RIO) and Vale (NYSE:VALE). The move is not limited to just iron ore names -- more diversified names have benefited from the move in iron ore, like Teck Resources (TCK) and BHP Billiton (NYSE:BHP).

Looking further downstream, what does iron ore's recovery do for coal? Coal still remains the world's major fuel for steel production. The coal space is riddled with bargains, but for as many bargains the space is ripe with, bankruptcy on speculation of overextended CAPX and broken contracts continue to pull coal names around the world down. A slightly safer way to play coal may be through the commodity ETF Power Shares Global Coal Portfolio (NASDAQ:PKOL).

The move into iron ore names may seem straightforward, but a word of caution is required. There is now speculation that China is considering a program that would heavily support Chinese iron ore companies. According to the China Securities Journal, China's government is in the process of finalizing a tax cut to help Chinese iron ore companies. The report goes on to say the new government officials are looking to work with the Ministry of Finance in order to create a new tax plan to cut the burden on domestic iron companies.

The current thinking is to cut the current tax rate of 25% in half by 10-15 percentage points. An insider told the China Securities Journal that fuel bought by the miners would be for self-use and would still need to pay a Value Add Tax (VAT). However, this should be cancelled.

The lowest iron ore prices currently in China range from $90-$100 per ton. Crude steel production estimates for China are roughly 700 million tons for 2012, which translates into roughly a need for 1.1 billion tons of iron ore.

Here comes the key point of this article: In order to meet China's steel production need, China currently imports roughly 60% of its iron ore demand.

What does this translate into dollars? The average import price for China's iron ore from January through October has been roughly $131 per ton, according to CISA, with imports reaching 607 million tons. That's a value of more than $80 billion for the first three quarters of 2012 and it is expected to reach $100 billion by the end of 2012.

Bottom line: There is a rally here and one that looks to continue into 2013.