Bullish forecast for iron ore producers 7/01/2010 6:56:01 PM
Iron ore producers are posting strong share gains, amid rising spot prices and a growing expectation that benchmark rates will rise at least 20 per cent next year.
Shares in iron ore companies have swept higher in recent trade, with Fortescue Metals Group Ltd rising nearly 13 per cent on Wednesday, but pulling back about 0.6 per cent on Thursday, to close at $5.17.
The iron ore producer has risen nearly 25 per cent since lows in December.
Iron ore juniors have also posted healthy rises in recent days and on Thursday, despite a broader market fall, Atlas Iron rose 4.69 per cent, BC Iron gained 2.73 per cent and Brockman Resources gained 4.65 per cent.
StockAnalysis author Peter Strachan said iron ore producers had been caught up in optimism about benchmark negotiations currently underway.
"There is perhaps a growing consensus that iron ore's basic price will rise by between 20 and 30 per cent, if you base that on what is happening in the spot market," Mr Strachan said.
Big iron ore producers are locked in talks with large steelmakers to decide on this year's benchmark rates, with many analysts tipping big rises.
Last year Chinese steel producers got their fingers burned after refusing to cut a benchmark deal on iron ore, and were forced to pay higher rates than their competitors in Japan and elsewhere.
Iron ore is needed to make steel, and Chinese steel mills are the key market for Australia's iron ore exports.
Mr Strachan said the rising influence of the Indian market was also boosting prices.
"Traditionally India has been a supplier of iron ore, not a consumer, so we are getting close to the crossover period now," he said.
"The feeling is India will become a net importer of iron ore rather than an exporter."
Client adviser with Bell Potter Securities, Chris Kimber, tips benchmark iron ore prices to rise about 40 per cent during the current negotiations.
Mr Kimber said spot prices were currently about 80 per cent above the benchmark rates negotiated last year.
"At the moment they are expecting 20 per cent (price rise), but my guess is that it will be about 40 per cent," Mr Kimber said.
"Chinese demand is picking up and continuing to go as we thought it would.
"I think there is probably another year of acceleration of that before it tops out," Mr Kimber said.
But Mr Kimber discounted rumours that Chinese negotiators may seek to use detained Rio Tinto employee Stern Hu as a pawn in dealings with the mining company.
Rio Tinto is Australia's largest iron ore producer and Mr Hu, an Australian, was part of the company's Chinese negotiating team in Shanghai before he and three Chinese colleagues were arrested on July 5.
Mr Hu was originally accused of spying, which was later downgraded to claims of violating commercial secrets and bribery.
Since being detained Mr Hu and the other detained Rio Tinto employees have not seen their families.
A spokesman for the Australian Department of Foreign Affairs and Trade said the period for investigating Mr Hu's activities had been extended until January 11 in accordance with Chinese law.
"Further extensions are possible if the investigation is not completed by then," the spokesman said.
ARH Price at posting:
51.5¢ Sentiment: None Disclosure: Held
