I think the CBA analysts need to have a look at BCI margins...

I think the CBA analysts need to have a look at BCI margins before going off half cocked and being quoted in the press like they have been here. In ay case, they do say that BCI and other juniors have "massive" leverage to the elevated iron ore price.

The Australian

Mining & Energy
Iron ore boom vs. Rudd's doom

by: BARRY FITZGERALD and PAUL GARVEY
From: The Australian
August 16, 2013 12:00AM

Iron ore boom defies Rudd's resources doom

Fortescue's Andrew Forrest at the opening of a new iron ore export berth at Port Hedland in the Pilbara yesterday Source: Supplied

ON the hustings and in his campaign ads, Kevin Rudd has been calling the mining boom over.

"The truth is in 2013 the China resources boom is over," the Prime Minister said on July 11. At the leaders debate on Sunday: "The truth is, with the ending of the decade-long mining boom, we face new economic challenges." At almost any media opportunity, the mantra is repeated.

But he must have forgotten to tell the Chinese -- the world's biggest buyer of mineral commodities.

Ever since returning as PM on June 26, the price of iron ore -- Australia's biggest export by a big margin -- has not looked back as Chinese steelmakers frantically restock on the expectation that while there is a slowdown in the country's infrastructure and urbanisation boom, an economic growth rate of more than 7 per cent on an already greatly enlarged economy means it still needs to suck in vast amounts of the steelmaking raw material.

Iron ore has surged by 26 per cent, or $US29.80 a tonne, to $US142.80 a tonne since Mr Rudd returned to the Lodge and began mapping a re-election strategy that in part at least, links the claimed end to the mining boom to Australia's ballooning budget deficits.

But iron ore has now moved back to five-month highs measured in US dollars. In Australian dollars, the current price of $156.27 a tonne is the best since October 2011. The local price is now up by $33 a tonne, or 28 per cent, which if sustained over a full year would add $20 billion to export revenues.

Copper and the rest of the metals complex have also moved up decisively in recent weeks, buoyed by the economic news out of China, the US and hopes of an improving Europe. Base and precious metal markets nevertheless remain volatile and well short of average prices achieved by the industry in the June half.

That has not been the case with iron ore's stellar price performance -- one achieved against a wall of naysayers who have predicted a price crash in the current second half as rising production in the Pilbara, Brazil and increasingly Africa outstrips demand.

In equity markets, the doom merchants continue to hold sway, giving Mr Rudd support on the halcyon days for iron ore being at an end. Atlas Iron is an example. The last time iron ore was trading at these levels, its share price was 75 per cent higher than yesterday's market price, $1.01.

Atlas managing director Ken Brinsden said yesterday that the company fully expected that there would be volatility in iron ore prices. "But on average, we also expect we will continue to get a very good price for our iron ore," Mr Brinsden said.

He said share prices not reflecting the current elevated iron ore price was a result of six to nine months of negativity around China's economy that had "been feeding on itself". And as for what Canberra has to say on the subject, Mr Brinsden said he had long argued that the outlook should be neither over-hyped nor understated. "The middle ground is best," he said.

Speaking from Port Hedland yesterday, Fortescue chief executive Nev Power warned that the iron ore market was characterised by its fluctuations. "We will always see fluctuations in the iron ore price because the supply and demand balance changes," Mr Power said. Fortescue was moved into a drastic restructuring last year when iron ore prices plunged to $US80 a tonne.

"What we saw last year was a massive destocking at a time when there was a lot of uncertainty within the Chinese economy," Mr Power said. "That's very different to what we see today. The Chinese economy is growing very strongly at 7.5 per cent and, on the size of the economy that it is this year, that's a bigger growth number than we saw at the peak in 2007.

"These fluctuations will always occur due to restocking and destocking cycles, we don't see any major change from the trading range it's been in in the last six months."

Since the start of the year the iron ore price has averaged $US135 a tonne. Despite the recent price surge, iron ore is short of its peak this year of $US158.90 a tonne on January 2, and the $US180 a tonne-plus all-time highs of 2011. Offsetting the retreat from all-time highs has been the massive growth in production, a theme that Resources Minister Gary Gray highlights with his references to the price-led boom becoming a production-led boom.

The stand-off between where equity markets think iron ore is headed -- the consensus is for a retreat in the latter part of the year to $US120 a tonne, and lower again in future years -- and where it actually is, is tipped to have a range of impacts, according to Commonwealth Bank equity analysts.

For Rio Tinto and BHP, it means the additional cashflow would assist in their focus on balance-sheet consolidation, bringing forward the time when the companies may begin returning capital. For Atlas and other juniors BC Iron, Mount Gibson and Gindalbie, the leverage to elevated iron ore prices was said to be "massive".

"These companies are operating on earnings before interest and tax margins in the $20-$30-a- tonne range, so an extra $US10 a tonne "would result in large earnings and valuation upgrades". But like much of the equities market, the CBA analysts are expecting an eventual retreat in iron ore prices to an average of $US113 a tonne in 2014 and $US103 in 2015.

On the current high prices, CBA said it appeared that Chinese steel output was performing against expectation, and India's iron ore trade was much higher relative to expectation.

"Combined with weaker Chinese domestic supply growth, the iron ore market is currently tighter than most -- including us -- had thought," CBA said. It added that, relative to consensus, the iron ore price risk was "tilted to the upside in the near term".