IRON ore prices have slumped to seven-week lows of $US108.60 a tonne, prompting fund managers to lower valuations of the leading producers and rotate out of higher-cost producers on fears that the steelmaking raw material could fall further.
Fresh from an all-embracing tour of China, institutional funds manager JCP Investment Partners has told its clients that it now expects iron ore to transition to its “long run’’ expectation of less than $US80 a tonne “more quickly than we had previously forecast’’.
JCP said that while it expected iron ore prices this year would remain relatively robust at more than $US100 a tonne, next year would be a different story. “Flat to declining Chinese steel demand means the wave of Australian and Brazilian supply hitting the market in 2015 will push prices down to $US80 a tonne,’’ itsaid. “This change has lowered our valuations of Rio Tinto, BHP Billiton and Fortescue … which has resulted in our portfolio exposure being reduced slightly for these companies.
“A consistent message from steelmakers was that pellet and high iron (content) premiums will increase, while at the same time the discount for lower iron (content) ores (in particular with impurities like silica and alumina) will suffer a relative increase,” JCP said.
“From a company perspective the biggest negative impact will be on Fortescue, which is a key reason why we maintain an underweight/short position in this company. BHP and Rio remain highly profitable at our reduced iron ore price forecasts.”
ANZ commodity analyst Mark Pervan put iron ore’s $US2.40, or 2.2 per cent, fall on Monday — as measured by The Steel Index (TSI) — down to news that Chinese regulators were increasing their scrutiny on iron ore trades. He said there were reports that the regulator, the China Banking Regulatory Commission, had requested banks investigate iron ore financing deals to reduce “fake” trades and improve risk management.
In Chinese futures trading yesterday, iron ore prices had firmed slightly. But it was not enough to stop a fresh attack on the share prices of Australian producers.
Rio fell 76c, or 1.22 per cent, to $61.30 and Fortescue slumped 12c, or 2.34 per cent, to $5. BHP’s more diversified earnings base saw it fall only 26c, or 0.7 per cent, to $37.61.
Iron ore — Australia’s biggest export earner last year at $US57 billion on government figures — is already down substantially on last year’s (calendar) average of $US135 a tonne.
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