more ships, page-2

Break out any momment now. 25 cents within striking distance. Short covering will be violent.

Analyst after analyst upgarding IO price not just for 2013 but for 2014.

They reckon destocking has already been don earlier in the year. If that's the case, spot price IMO could head towards $150/T.

Now read on.....................................

No Seasonal Crash For Iron Ore
FNArena News - August 12 2013

- Chinese iron ore stocks currently low
- Steel production remains strong
- Global supply more balanced than thought
- Upward pressure on iron ore prices


By Greg Peel

In June last year the spot iron ore price was around where it is now, above US$130/t. By September it was trading under US$90/t in a move that took all observers by surprise and put the fear of God into Australia’s junior iron ore miners and even Fortescue Metals (FMG), given spot prices had fallen below the cost of production for those without legacy high grade operations such as BHP Billiton ((BHP)) and Rio Tinto ((RIO)).

By year-end the price had recovered to above US$120/t, and Twiggy Forrest had lost a bit more hair.

Such volatility in iron ore prices is a result of China’s predilection for inventory stocking and destocking phases rather than “just in time” inventory management. Chinese traders to tend to buy up and store when prices are low then run down supplies when prices are high. Resultant swings in supply-demand put a good deal of pressure on a market now shifting towards greater spot pricing for seaborne cargoes.

The good news is analysts do not see the same seasonal destocking event occurring in 2013.

In July 2012 Chinese port inventories of iron ore peaked at 100mt before the destocking phase ran that down to 75mt by April 2013. Destocking sent iron ore prices tumbling in the third quarter of 2012 but JP Morgan reports current port inventories are at the low end, at 76mt.

Indeed JP Morgan has found no real evidence of seasonal trends in Chinese steel inventories, iron ore imports and port stocks. Steel production does typically peak in the summer months, but that’s about it.

There was some concern in the first half when the spot iron ore price fell from near 160 in February to near 110 by June, with an air of “here we go again” about it, but the price has since rebounded once more to above 130 and analysts can’t see any reason for it to fall materially for the rest of the year. The third quarter average price to date is 128, Commonwealth Bank analysts note, against consensus forecasts of 123. Chinese steel output remains at around 780mtpa, or 9%pa growth if sustained, which is above GDP growth and well above CBA’s 4.5% forecast.

Steel consumption is being supported by a steady lift in Chinese infrastructure spending, while strong property construction sales in the first half 2013 are also contributing. Last week Beijing announced accelerated railway construction, suggesting infrastructure may yet benefit from further government stimulus. Such consumption has steel inventories cycling lower at present, suggesting restocking could sustain even higher steel production.

On the global iron ore supply side, the Indian government is predicting net imports of 12mt for the year ending March, 2014, which is a big swing from 2009’s 113mt of exports. This rebalance in seaborne supply is enough to neutralise Fortescue’s expansion to 120mtpa, CBA notes.

Iron ore port stocks remain low, as JP Morgan has noted, suggesting potential restocking, while Chinese domestic iron ore supply is not seeing its usual summer boost. At a Chinese median mining cost of US$110/t, Chinese supply is sensitive in a spot price range of 120-130, CBA suggests. Prices above 130 may nevertheless make more supply economic.

The CBA analysts’ conclusion is that the global iron ore market is tighter than most observers assumed, including themselves.

JP Morgan’s analysts have been re-examining their iron ore cost curve analysis, having last updated in March. They have decided Rio’s “Pilbara 360” project is likely to reach capacity later than previously expected, thus pushing the feared “wall of supply” out in time. And the 780mt of Chinese 2013 steel production to date has the analysts lifting their 2013 average forecasts, thus lifting the demand-side expectation.

The analysts have plugged their latest forecasts into their cost curve model and decided the marginal cost of production will remain above 125 to 2015 and above 100 to 2020, implying JP Morgan’s house iron ore price forecasts may need to be lifted. The greatest beneficiaries of stronger iron ore prices will be Australian producers, JP Morgan contends, given the fall in the Aussie dollar.

BA-Merrill Lynch has, nevertheless, decided to upgrade its price forecasts right now. "Contrary to conventional wisdom," says Merrills, "the iron ore market has remained in reasonable balance year to date". A combination of supply disappointment from India and Brazil, and to some extent Australia, and stronger global demand, especially from China, has underscored a market balance, notes Merrills, that has kept prices averaging around the 130 mark in 2013. The demand side is being particularly supported by Chinese steel production numbers which are "challenging expectations" while inventory levels of both steel and iron ore remain "reasonable".

Merrills thus suggests there may even be a "supply shock", with supply falling short of demand by around 40mt in 2013 and beyond. The broker has upgraded its forecast iron ore prices, lifting its 2013 assumption by 12/t to US$131/t and its 2014 assumption by 15/t to US$121/t. No currency forecast changes accompany the upgrades at this point. The flow-through to Merrills' forecast earnings for Australian iron ore producers is significant, with FY14 numbers rising around 14% for BHP and Rio and 50-100% for Fortescue, Atlas Iron ((AGO)), BC Iron ((BCI)) and Mt Gibson Iron ((MGX)).

Possible Chinese destocking remains a risk, always, says Merrills, but it appears that destocking may have occurred earlier this year. Perhaps Beijing's tightening of credit conditions from mid-2012 has prompted this shift, the broker surmises. The spot iron ore price rallied some 70% from the September 2012 low to the January 2013 peak. This doesn't have to happen again, but the latest rally from the low is now worth 25%, Merrills points out.