bounce down nears for iron ore
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Bounce-down nears for iron ore
Stephen Bell Tuesday, 12 September 2006
IS IT really that time of the year again when two hard-nosed teams bang heads in an annual quest for glory? Yes it is, but the Metal Detective is talking iron ore, not Aussie Rules football. The Metal Detective, by Stephen Bell.
Unlike the Sydney Swans and Adelaide Crows, Team China and the Multinational Rock Kickers (comprising Rio Tinto, BHP Billiton and Brazil's CVRD) aren't expected to face off until November.
But already the key players are jockeying for position, in a re-match where the prize money runs into billions of dollars.
It could be another tough and gruelling contest.
The last season only ended in May, when CVRD settled on a 19% price hike with European steelmakers, badly embarrassing China, which had been outspoken in its efforts to cap the increase at 5%.
London-based Numis Securities believes next year's settlement – for shipments starting April 1, 2007 – will be much less headline-grabbing, tipping a rollover of contract prices.
"We believe price drivers are now more balanced and the large moves in recent negotiations will not be repeated – we think an outturn in the range of +/-10% is likely," the broker said.
A rollover wouldn't be a bad result for miners, given that prices have doubled in two years.
One issue to watch out for is the recent sharp hike in freight rates, making it more expensive for China to buy ore from distant places such as Brazil.
This may make it tougher for CVRD – the price setter in recent years – to argue another price increase with the Asian powerhouse.
China will certainly clutch at any straw – freight rates or otherwise – in its determination to slash what it sees as price gouging by the iron ore exporters.
Yet the country may still be backed into a corner because of its rampant steel production.
In January-July 2006, Chinese steel production grew 19% year-on-year, suggesting an annualised rate of around 400 million tonnes this year. China accounts for about a third of world steel production, Numis notes.
And despite rising domestic iron ore production, China's iron ore purchases are still growing – calendar 2006 imports may rise 16%.
However, it is a marked slowdown from the 30% growth rate of recent years, suggesting that a further large price increase is "unlikely in our view", says Numis.
The broker also expects China – suffering from a fragmented steel sector – to be much better prepared this time around.
One of its leading metals industry associations, China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters, was said to be meeting last week to discuss strategies. These may include reducing the number of licensed iron ore importers.
Citigroup is also sceptical of another price jump – it recently tipped a 10% slide next year.
Unexpectedly rapid increases in iron ore production from China and India are "casting a shadow over the tight outlook for the seaborne iron ore market, and threaten to undermine the seaborne oligopoly dominated by Rio Tinto, BHP Billiton and CVRD", the broker said.
Whatever the end result, we are only a few weeks away from the time when iron ore price speculation will start impacting on share values.
Of the two Anglo-Australian majors, Rio Tinto's earnings are becoming increasingly reliant on iron ore.
Theoretically, that means Rio's share price will be more vulnerable than BHPB's if iron ore prices do look like sliding next year.
Citigroup prefers BHPB partly for that reason, noting that iron ore represents around 33% of Rio's forecast 2007 earnings versus 15% for BHPB.
At the smaller end of town, Andrew Forrest's Fortescue Metals Group will be keeping a close eye on the price talks, having recently raised $3.2 billion to build its Pilbara iron ore venture.
Fortescue shares have slid 20% since the company secured its debt mid-August, and could come under additional pressure if investors start worrying about an iron ore price slump.
Along with pricing uncertainty, the market will be watching for any signs of delays at Fortescue, which aims to become Australia's third-biggest producer from 2008.
There will be a host of other anxious spectators, particularly juniors on the verge of production such as Murchison Metals and Aztec Mining.
The impact of the price talks may flow as far as the infrastructure sector, where private group Yilgarn Infrastructure plans to develop a $2 billion multi-user rail and port system in the Mid-West region of Western Australia.
The Chinese-backed venture, unveiled last week, proposes an IPO in 2007 and will be hoping for a continuation of the strong market to entice investors.
Bottom Line: it is still early days for iron ore tipsters. Don't rule out another price hike just yet, as there is plenty of game time left.
After all, the Geelong Cats were close to premiership favourites after winning the pre-season cup in March. They then failed to make the AFL finals.
MD expects plenty of twists and turns before the final siren.
He's warming the set and cooling the tinnies. It should be an entertaining game.
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