great article from the wall street journal. I particularly like the bottom quote
"Iron-ore prices have been surprisingly strong during a period where many had assumed prices would be weaker," Investec analysts said in a research note.
SYDNEY—Iron-ore prices have surged to near four-month highs, driven by restocking by some Asian steel mills, but widely expected slower growth in China, its efforts to cut steel overcapacity and additional supplies of the commodity will likely cap the rise.
The benchmark for iron ore is at its highest since Aug. 15 after falling just five of the past 25 trading days. Imports of ore with 62% iron content are selling for $139.70 a metric ton at China's Tianjin port, according to data provider The Steel Index. That's up from $136.40 a ton at the end of last week and 20% higher than six months ago.
"In the dead of winter it's tough to move bulk commodities like iron ore—the seas can freeze up and once you do get cargoes to land there are rail issues, "The steel mills in Asia know this, so they are stocking up to ensure they have enough to see them through."
A robust Chinese economy also has helped underpin demand for iron ore, which is used to produce steel. China is the world's largest buyer of the commodity, accounting for some 60% of seaborne trade. The world's No. 2 economy has been the key driver of demand for iron ore to fuel output of everything from bridges and skyscrapers to automobiles and home appliances.
The government's mini-stimulus earlier this year helped push economic growth to 7.8% in the third quarter, ending fears of a sharp slowdown. China's crude-steel output continues to be robust—production rose 8.3% in the first 10 months of the year and 9.2% in October.
The longer-term outlook for the metal is less certain. China's government has been tightening credit due to concerns about high debt levels in the financial system. Many economists are forecasting growth may slow toward 7% next year as the government tries to shift the focus of the economy away from state-led investment, which could hurt construction-related projects.
Extra supply from a bevy of new mines in Australia and elsewhere also could undermine iron-ore prices. Even with the current rally, iron ore is still trading below its level at the end of 2012, when it was $145 per ton.
Still, China's growth for now is lending support to the metal. The resilience of iron ore, when prices of other industrial commodities like nickel and aluminum are falling, has taken commodity strategists and brokers by surprise. Prices in 2013 have been mostly stable, although they dipped earlier this year as China's economic growth slowed to 7.5% in the second quarter, from the double-digit rates of recent years.
"Iron-ore prices have been surprisingly strong during a period where many had assumed prices would be weaker," Investec analysts said in a research note.
A sharp tightening of the easy credit terms that underpinned economic expansion earlier this year has yet to fully take its toll on industrial activity.
While Chinese iron-ore imports slipped 9% in October from September's record high, shipments were still up a hefty 20% from a year earlier, according to Chinese customs data. Trade data for November is due Sunday.
The main drivers of the economy now, as in the past, are government-led projects. Spending on large-scale infrastructure—including subways, airports, oil-refineries and new cities—is leading the growth wave.
Partially offsetting this drive from growth are government efforts to reduce excess capacity and cut pollution by shutting some of the dirtiest factories and smelters whose emissions are choking the country's cities. China's northern steel city of Tangshan, a major production center, plans to cut its steel-production capacity by a third over the next four years.
In May, Chinese Premier Li Keqiang vowed to curb expansion projects in industries where there is overcapacity, such as steel, aluminum, cement and shipbuilding.
China has an annual steel-output capacity of around 1 billion tons, and nearly 20% of this is idle, according to the world's top iron-ore producer, Brazil's Vale SA VALE5. In October, China's industry ministry said it is working to reduce overcapacity in line with a government directive issued that month.
Investec analysts said stockpiling ahead of winter now appeared to be underpinning demand for the commodity, although ANZ Bank analyst Ankit Pahuja said in a note Thursday that he expected this "to be short-lived and prices to moderate coming into the New Year."
Miners in Australia's iron-rich Pilbara region in the country's northwest, including global giants Rio Tinto have been reporting record output of the reddish-brown rocks to feed China's appetite.
Rio Tinto last week committed to increasing its annual iron-ore output in Australia by more than 20% over the next four years in a bet that Chinese demand will remain robust. "The attractive long-term fundamentals for iron ore are underpinned by urbanization and income growth in the developing world, particularly China," said Rio's head of iron ore, Andrew Harding.
BHP and Fortescue Metals Group Ltd. have opened new iron-ore mines in Australia recently, and a potential resumption of iron-ore exports from India could further add to output.
Citigroup last month upped its 2014 forecast for iron ore—the only bulk commodity for which it has lifted its expectations. It now expects prices to average $120 a ton next year, up from an earlier forecast of $115 a ton.
FMG Price at posting:
$5.68 Sentiment: ST Buy Disclosure: Held
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