Iron Ore Spot Prices Predicted to Drop by Mid Year

Analysts say the increase is a temporary result of Chinese re-stocking at a time of lower supply. China is in the midst of the harshest winter in three decades which has contributed to the continued shutdown of up to 15 percent of Chinese iron ore mines and an upswing in imports. India has shut down illegal mines and banned exports from key producing states. In addition, Brazil and Australia are regions to watch as both face climate instability for the next few months.

Deutsch Bank says, as a result, spot prices may be pushed as high as $170 per tonne with a drop back to $120-$125 per tonne by midyear as China mines reopen and Australian mines boost production. Credit Suisse analysts also expect prices to drop by midyear and then continue on a decreasing trend to $90 per tonne by 2015. Bloomberg forecasts iron ore to average $120 per tonne for the first quarter of 2013.

The report from one of our China iron ore trading sources says China is making up the ore shortfall from India with imports from South Africa, Morocco and Mexico and, by doing so, is getting better quality and assurance of on time delivery – something which was missing from their former Indian suppliers. Port stock levels have dropped from 90 million to 70 million metric tons, driving buying and pushing prices up.

Consortium groups in Hong Kong and Singapore are buying ore at asking prices or higher and then reselling it into China at 60-90 day payment terms with interest rates cut by 2 percent per annum. China buyers trying to avoid the credit crunch are jumping at the chance to use the groups to get better payment terms despite higher iron ore payments. Here is how our source explained it to us late last week: “What they are doing is HK and Singapore Banks have 2-2.5% Interest Rates whereas the Interest rates are 7-9% and for some 12%, and when BHP, Rio, Vale, etc.. come in the market with Ore at (i.e USD125/mt cnf fo), these guys buy at the asking price or even slightly higher just to get the cargo, and then they sell in China on 60-90 day payment terms with 2% per annum lower interest rates, so they may lose money on the purchase price, but they make it up on the interest rates. This is driving the markets more than Port Stock shortages as every offer, whether increased price or not, is accepted by these groups. The credit crunch in China is driving buyers to use these groups as they get better payment terms even with higher interest rate payments.”

Our iron trader believes it is only a matter of time before iron ore returns to November trading levels.

Update on Australia

On Sunday SMU reported on Cyclone Narelle approaching the northwestern coast of Australia. Although the storm battered the coast and disrupted operations at ports, communities and mining operations in the area were generally undamaged. The cyclone was downgraded from Category 5 to Category 2 and moved parallel to the coast rather than making landfall.

High wind and wave activity caused Rio Tinto, the world’s second-largest iron ore producer, to suspended ship loading at the ports of Dampier and Cape Lambert. Woodside, Apache and BHP Billiton disconnected oil production vessels from offshore fields and Apache halted production at its Stag and Van Gogh fields. Chevron Energy prepared to evacuate staff at its $27 billion North West Shelf LNG project in Karratha in the event the cyclone gained intensity or changed direction.

The storm is expected to continue to weaken as it moves south. Narelle is the first cyclone of the season for Australia which normally experiences seven cyclones between December and April.