australian article iron ore outlook good

Iron ore falls to earth with correct price

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COMMODITIES, Andrew Main | January 09, 2009
Article from: The Australian

IT'S probably a bit early to call a recovery but global iron ore prices are showing signs of life.

Most particularly, Westpac says Chinese imports of Australian iron ore have "moderated, not collapsed".

That's the worst element of any putative slump. Things are crook, but not as crook as people thought, effectively.

A report published by Westpac yesterday says spot iron ore prices into China have steadied at around the levels of early 2007, in US dollar terms, which means of course they are worth well above that in Australian dollars, given that our dollar spent most of 2007 above US80c.

The whole iron ore price issue is looked at in Australia through the prism of the 2008 settlement, which pushed an 80 per cent jump in price to approximately $US144 a tonne from $US80 a tonne. Every event in the iron ore market since then has looked like a trip downhill, but in fact it's been a correction from what we now realise was the absurdly high aberration of the 2008-09 contract prices that run from April 2008 for a year.

Most expectations for the 2009-10 contract period (which won't be settled until around June of this year) are for a number closer to $US100 a tonne but that is still a significant improvement on the 2007-08 price of around $US80 a tonne.

There are numerous issues clouding the iron ore export story -- most particularly the widely reported situation in November and December when a number of Chinese iron ore importers chose not to send ships to Australia to pick up cargoes, either because their stockpiles were full or they had had difficulty obtaining letters of credit to pay for the cargoes because of the economic uncertainty surrounding the industry.

October and November, if you remember, were the months in which Australia's iron ore export industry was significantly discounted by analysts because of the giant gulf between contract and spot prices.

Andrew Forrest's Fortescue Metals Group did not make the picture any clearer by reneging on shipping contracts that had been struck at prices during the boom of mid-2008, when a bulk carrier cost approximately $80,000 a day.

That has dropped to around a quarter of that figure and there are a number of cases afoot in US courts filed by shippers whose vessels were turned away from Pilbara ports late last year.

"Cape size rates have bounced 60 per cent off their lows but are still more than 90 per cent off their peak," said the Westpac report, noting that is was only in 2008 that Australian exporters finally gained a premium for being closer to Asia than other iron ore exporters, most particularly Brazil.

"There are signs that Chinese demand may have found a base with spot iron ore prices up by 16 to 245 per cent from October 2008 lows," it said. "Given the large infrastructure program lying in the wings we are not surprised Chinese steel producers are pushing for an early settlement to current negotiations."

Spot iron ore prices aren't carried by the London Metal Exchange but the report indicates that the price has jumped from just over $US60 a tonne to around $US80 a tonne, which incidentally is the same price that iron ore contract exports were going out at until the bonanza deals announced by Australian exporters after April last year.