FNArenaMetal Matters: Steel, Iron Ore and Base MetalsFNArena...

FNArena

Metal Matters: Steel, Iron Ore and Base Metals

FNArena News - March 18 2013

-Steel pressures iron ore prices
-Oz miners still strong, ready for upgrade
-Price at US$80/t makes mid caps marginal
-Base metals still diverge


By Eva Brocklehurst

Standard Bank analysts have paused to explain the sudden drop in iron ore prices, some 16%, to US$133 tonne since February 20 latest spot US$134.60/t). The focus is on China, of course, and the large steel industry capacity that exists. The analysts note China's steel industry association (CISA) forecasts the country has over 960 million tonnes of installed steel capacity compared with an output rate of 716mt last year. This suggests utilisation rates of around 74.5%. The remaining capacity needs to maximise returns from the start of each new year as end-user demand ramps up from the end of March, when the northern construction season emerges out of the winter.

What happened this year was an excess of steel output occurred from January and sent Chinese steel warehouse inventories soaring towards 21m tonnes more recently. For Standard Bank analysts this meant Chinese mills returned from the new year holidays with a need to de-stock at a time when they were expecting rising demand and pricing momentum. Moreover, recent policy prognostications from both the central bank and the government made the steel mills and consumers even more jittery. How much steel should consumers buy and how much should mills produce? The end result, according to the analysts, was steel prices falling around US$20/t for long steel, and as much as US$60/t for flat steel.

So, despite low iron ore inventory levels at the ports and poor availability of fresh ore deliveries, steel mills had to enact a raw materials boycott over the past month. This reminds the analysts of the time last year when iron ore prices plunged from US$135/t to US$87/t. It appears steel versus raw material margins are aligning and steel inventories are starting to clear and the analysts expect iron ore prices will once again rally in the June quarter. Iron ore swaps are forecasting a price of US$129/t for Q213 but the analysts believe this price is a bit low.

For CIMB the iron ore price movement translates to something simple for Australia's miners. Focus on costs. The broker believes the miners are cum-upgrade unless prices continue to decline sharply. In this environment Fortescue Metals ((FMG)) is the more vulnerable, with higher gearing and higher costs. In the broker's view FMG will need to differentiate itself from Mount Gibson ((MGX)) and Atlas Iron (AGO) on margins.