iron ore demand on the improve

1)COMMODITIES ANALYSIS; Iron Ore - Market Comment

Recent data points suggest that Chinese imports of iron ore could surprise on the upside in January and February:

1. Brazilian exports of iron ore increased 27% mom in January to 17.5 million tonnes. With no apparent improvement in demand from Europe, Mid-East or Asia (ex-China) it seems probable that most of the additional Brazilian volume was shipped to China.

2. Dry bulk freight rates have picked up - particular strength in the C3 route (Tubarao to Beilun) currently quoted at US$20/t up from a low of US$7/t in late November. This is consistent with our assertion in point 1.

3. Vessel nominations for February loading of iron ore ex-Australia have increased sharply – our freight industry contacts suggest one leading shipper has increased bookings by as much 35% for February loading. Market related comments form several Australian iron ore producers support the view that export volumes have risen in recent months. As we noted in point 1, we can only assume that the additional tonnage is flowing into China.

4. Rising Chinese domestic steel prices - conducive to higher crude steel production at a time when domestic ore supply from the north is constrained for seasonal reasons – hence greater demand for imported ore.

5. Spot prices for Indian iron ore shipped to China are approximately 25% above their late October lows.

6. Recent remarks from BHP suggest that destocking has run its course in iron ore in China (refer to Neil Goodwill’s research note on BHP’s 1H09 earnings see Daily Cable dated 4 February 2009).

The recent improvement in China’s appetite for imported iron ore should help the negotiating position of the miners in their forthcoming annual contract negotiations and could lift investor sentiment towards the iron ore sector. However, we continue to forecast an oversupplied seaborne market this year and maintain our view that benchmark contract prices will fall by 30% - albeit with the important caveat that average realised prices could differ markedly from benchmark contract terms as pricing mechanisms for iron ore evolve and a greater proportion of Australian ore is sold on spot and/or hybrid contract basis. Moreover, we continue to believe that Australia’s share of the Chinese import market for iron ore will increase this year (from 41% in CY08) largely at the expense of India which accounted for 21% of Chinese imports in CY08, so market share gains for Australia could offset an expected decline in total Chinese imports of iron ore this year.

2)Surging Baltic Dry Index may signal the worst of Chinese commodity

de-stocking is over, with bullish implications of iron ore producers, particularly

Fortescue (FMG.AU), according to The Charlie Aitken Report. Notes 15% rise in Baltic Dry

Index after stronger-than-expected Chinese PMI data.