Iron ore and copper are looking solid in what may be a good year...

Iron ore and copper are looking solid in what may be a good year for commodities




THIS year is shaping up well for commodities that dictate the share prices of the nation's miners, as unsustainably low steel production in China and a dearth of new copper production point to potential price gains for iron ore and copper.

However, analysts routinely warn investors should not be surprised if the immediate price direction is not up, particularly if Europe worsens.

In recent months, Chinese steel production has been sent tumbling by destocking related to European contagion, tightened credit availability and lower demand, helping push iron ore prices down 20 per cent to finish the year at $US142 a tonne, according to Metal Bulletin.

But production in the world's biggest steelmaker has slipped to about 600 million tonnes annualised, suggesting iron ore prices have probably moved too far.

Analysts said the world's steel output had already fallen to global recession levels.

"Even to get zero growth in China next year, which in our view would be implausible given a historical trend growth of over 10 per cent, steel output in China should rally to over 700 million tonnes annualised at some stage in 2012," Credit Suisse's Michael Shillaker said.


A trip to China last month brought ANZ head of commodities research Mark Pervan to a similar conclusion.

"The view was that the current 1.66 million tonnes a day (steel) output level is about as low as it will get and that restoration towards 1.9 million tonnes a day is highly likely in the months ahead," Mr Pervan said.

"In the absence of a meaningful move in steel prices, the domestic view is that prices will be tightly range-bound somewhere between $US130 and $US160 (a tonne) for the coming year."

Copper ended 2011 down 21 per cent at $US7600 a tonne and also encountered Chinese destocking, but limited supply should provide a kicker to prices if there is restocking. BNP Paribas has cut its 2011 copper production estimate and its 2012 forecast because of lower than expected production.

"If the economy broadly holds up, then producers will be hard pressed to meet demand through 2012," BNP analyst Stephen Briggs said.

"Copper may continue to struggle in early 2012 but could then move back up towards $US9000 a tonne, helped by further monetary easing."

Potentially helping this is the view in China that there could be a strong restocking phase as seasonal demand starts to improve after Chinese New Year.

This could mean things are looking better for Rio Tinto, whose earnings are heavily weighted to iron ore and copper. It also bodes well for BHP Billiton. With its petroleum unit, the giant will also reap the benefits of oil's record end-of-year close of $US98.83, up 8 per cent for the year.

Not boding so well, given BHP's massive US shale gas spending plans, are US natural gas prices, which on the last day of trading for 2011 fell to a two-year low of $US2.99 a gigajoule, their lowest year-end close since 2001 and 32 per cent down on a year earlier.


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