Could be right cas1u1al, The chart showing the trend is your...

Could be right cas1u1al, The chart showing the trend is your friend and will continue on its merry way.

Daily Focus
15 January 2008

Iron Ore Sector

Iron Ore has obviously been a dominant force behind Australia’s resources boom, particularly in the past few years. In Macquarie Research Equities (MRE)’s view “Bulks still look particularly attractive in 2008, especially considering the upcoming iron-ore negotiations”, however investors will need to remain selective when constructing their metals and mining portfolios as the outlook becomes increasingly mixed.

Brazil v Australia
The growing gap between Australian and Brazilian contract prices on a delivered basis (using spot freight rates) had led to fevered speculation that the Australians may well achieve a larger percentage rise than the Brazilians in 2008 to close the discount of delivered Australian ore to Brazilian ore.

Iron-Ore Going Higher
Given the recent surge in spot prices to well above contract levels, MRE’s belief is that the market will consider the 2007 price rise of 9.5% as too low, and believe this will be taken into consideration in the 2008 price. The supply argument may well temper next year’s rises from the 50–100% range as suggested by some, but the iron ore shortage should still be apparent in 1H08 and fears of a delay in new supply hitting the market would be enough to maintain the momentum for a higher price.

MRE’s Forecast
MRE’s forecast of a 50% rise in iron ore relates to the ongoing contract market, and MRE now think that there will be no fundamental restructuring of arrangements here. As the big three embark on a programme of massive expansion over the next five years, they are likely to allocate a certain share of growth to the spot market, capturing significant upside over and above contract price realisations. Prices will be pitched above contract but below existing Indian spot on a cif and fob basis.

Diversified miners - The future looks bright. Like a number of industry participants, the majors continue to benefit from phenomenal market conditions. Those conditions, and a world-class asset portfolio, are set to deliver another year of record earnings and strong growth, with extensive volume expansion adding to the value play.



This information is not a personal recommendation. You should consider your financial situation and (if appropriate) seek professional advice before making an investment decision - see "Important Information" below.