Unlikely to see a repeat of the 2012 iron ore price correction
Private Client Research Company Review 8 August 2013
We have looked at seasonal trends in China steel production, iron ore imports, steel inventories, and port stocks. With the exception of China steel production, which typically peaks in the summer months, there is little evidence of any seasonality in the other data series, despite market concerns over a repeat of the significant price correction that occurred in the third quarter of last year.
We believe Chinese port inventories are currently too low to cause the destocking event that resulted in the September 2012 crash. Furthermore,an update to our iron ore cost curve analysis incorporating higher China steel production sees marginal costs remaining above US$125/t to at least 2015.
In 2012, a significant port destocking event caused iron ore prices to decline materially in the second half of the year. Iron ore stocks at Chinese ports peaked at 100Mt in July 2012 but subsequently declined 25% to 75Mt in April 2013. While this led to a significant decline in iron ore prices in the third quarter of 2012, the capacity for this to reoccur in 2013 is very limited given current port stocks remain low at 76Mt.
We have also taken the opportunity to revisit our iron ore cost curve analysis, which we last published in March 2013. Significantly, we suggested that Rio Tinto’s Pilbara 360 Project is likely to reach capacity later than previously expected, pushing out the “wall of supply.” Furthermore, with China steel production annualising at 800Mt in the first half of the year, we have increased our forecasts, with positive implications for iron ore demand.
Marginal cost analysis suggests prices will remain high for longer. Incorporating our latest forecasts into the cost curve model implies marginal cost of production will remain above US$125/t CFR China to 2015 and above US$100/t to 2020. We note this is well above our current house forecasts implying upside risk to our estimates. Given a weakening Australian dollar, we believe the Australian producers are likely to be significant beneficiaries of stronger iron ore prices.
AGO Price at posting:
96.5¢ Sentiment: Buy Disclosure: Held
