The rising spot price of iron ore, combined with a lower Australian dollar, could lead to widespread upgrades of the profit forecasts for local producers including BHP Billiton, Rio Tinto and Fortescue Metals Group.
The spot iron ore price rose $US5.60 a tonne to $US138.70 a tonne on Tuesday – just 12 per cent below its one year high of $US158.90 a tonne in February 2013. The price is 25 per cent higher than its calendar-year low of $US110 a tonne in June this year.
A strong spot price comes as Rio’s board assess when and how it will ramp up its iron ore production by 70 million tonnes to 360 million tonnes a year.
Fortescue, Australia’s third-largest iron ore producer, is also attempting to sell a minority stake in its infrastructure assets to repay debt. But there is growing speculation that a higher spot price is bolstering the group’s resolve to retain complete control over the assets.
Royal Bank of Canada analyst Chris Drew said the iron ore price could be underpinned in the short- to medium-term by strong Chinese steel production, record Chinese iron ore imports and low iron ore inventories.
“With iron ore and the Australian dollar looking more favourable for producers, we would expect consensus earnings upgrades to add further support to the producers,” said Mr Drew.
If conditions persist through the December half, Mr Drew said earnings per share forecasts could increase by 51 per cent for Fortescue, 24 per cent for Rio and 119 per cent for fellow Western Australian-based iron ore junior producer, Atlas Iron.
SEASONAL PERIOD OF WEAKNESS Credit Suisse analyst Paul McTaggart expects the market’s iron ore price forecasts to be revised slightly higher, leading to an upgrade in BHP and Rio.
“I don’t think iron ore will stay at $US130 a tonne. We are heading into a seasonal period of weakness when China construction demand weakens so I think iron ore prices will moderate. However, prices might come down to what will remain a relatively robust level – and come March of next year, when China is back online, iron ore could rally from a higher level,” he said.
“I think a re-rating of BHP and Rio is already under way.”
Despite growing optimism, the seaborne iron ore market is entering a period of seasonally low demand as Chinese steel mills cut production and push back on raw material supply.
This time last year, the iron ore spot price was trading at approximately $US113 a tonne but fell to a 12-month low of $US86.70 a tonne briefly in September 2012 before rebounding again.
Shareholders and analysts have feared the spot price could replicate that sharp drop again this year, or fall further, as forecasted additional iron ore supply led by Australian producers Rio and Fortescue undermines the price further. UBS believes the spot iron ore price could briefly plunge to $US70 a tonne before recovering.
Within the industry, though, there is optimism that the price plunge won’t be repeated. Philip Kirchlechner, director of consulting group Iron Ore Research, said iron ore stockpiles at Chinese steel mills were now at about 20 days’ supply, which is considered tight.
“With those kind of lower numbers, I don’t think there’s a huge risk for the price because steel mills cannot play too many games now and hope the price drops,” he said. Fortescue operations director David Woodall echoed the sentiments of his chief executive Nev Power when he told an iron ore conference in Perth on Tuesday that the price of the steelmaking commodity would remain strong in the near term.
FROM BREAKNECK TO VERY FAST “Every indicator that Fortescue sees from China sees steel demand being sustained in the short, medium and longer term,” he said.
“The growth rate in China has gone from the breakneck speed to one that is merely very fast.”
BHP and Rio shareholder, Tyndall Investment Management, said the Âmarket was starting to become more upbeat about the short-term iron ore spot price and the impact of the lower local dollar.
“If the back half of the year was going to surprise in any direction, it would be on the upside,” said Tyndall Investment Management deputy head of AustraÂlian equities Warwick Cumming.
BHP shares have rallied 19 per cent since the end of June to $36.96 while Rio shares have also climbed 24.5 per cent to $62.62 a share. Fortescue shares have risen 46 per cent since the end of June to $4.32 a share. The S&P/ASX 200 Index has risen 10 per cent over the same time frame.
Speaking at the conference, Professor Yongzhi Sha said Chinese steel consumption will grow at a low rate of two per cent over the next two years.
“That means steel consumption this year and out to 2015 should be between 730 and 760 million tonnes a year,” said Mr Sha at the Australasian ÂInstitute of Mining and Metallurgy Âconference. UBS analyst Tom Price said the iron ore price typically trades in a reasonably high range until the end of August when Chinese steel production is cut. A solid increase in iron ore supply from Australia, at the same time, will undermine iron ore prices.
“We still like iron ore over the next 12 to 18 months, we are just wary of a late third-quarter correction event,” he said.
“It could trade briefly below $US70 a tonne. When everyone thinks it is the end of the world it will rally again for the pre-winter re-stock event.”
MGX Price at posting:
72.0¢ Sentiment: Buy Disclosure: Held
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