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UBS Commodities: Spot iron ore price suggests >>20% price rise for JFY 08

Iron ore market continues to remain tight, and recent spot pricing suggests there is upside to market forecasts for next years pricing, which we estimate at c. +20%. Spot price for iron ore fines of US$115-120/t landed in China, equates to US$86-91/t FOB after backing out freight cost of US$29/t. Current contract price for fines is US$51/t FOB. A 20% rise takes this to US$61/t, still short of the spot price of US$86-91/t. Suggests upside to market forecasts for pricing next year.

Rio Tinto offers more leverage to iron ore price than BHP Billiton. About twice the leverage. Of the smaller iron ore plays, MGX and PMM stand to benefit immediately in terms of cashflow as they are producers, while a price rise above expectations will add to the positive sentiment surrounding the up and coming producers such as FMG, MMX, MIS, AGO, CLE etc… Also OST is a beneficiary from its iron ore sales from Whyalla.

Article from Steel Business Briefing follows….

Spot market prices for iron ore rise sharply in China
Prices for Indian iron ore in China have increased sharply since late July, Steel Business Briefing learns from market sources. The current price of Indian iron ore fines (63.5% Fe) is around $115-120/dry metric tonne on a cfr basis, up from end-July's $107-110/dmt.

The current freight rate for a 50,000 dwt vessel from India to China is around $28-29/t, slightly up from last month's $27-28/t, SBB learns from a shipping source.

Traders suggest that the rise in prices is mostly stimulated by a very active spot market. "Prices are shooting up at the ports and supply, especially for high grade fines, is relatively short," a trader says.

Prices of Indian ore at stockyards in China currently stand at around RMB 920/wet metric tonne ($122/wmt), including 13% VAT and port handling charges. This is up dramatically from last month's RMB885/wmt, SBB also learns.

A trader says the recent warming-up of the domestic steel market has strengthened traders' confidence as to how the second half will pan out.