(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, April 22 It's hard to
find any bullish predictions for iron ore prices, with the
consensus being that it will drop to below $100 a tonne. Except
this isn't reflected in the financial markets.
The latest bearish signal for iron ore is the decision by an
Indian court to allow the mining of 20 million tonnes per annum
in the state of Goa, most of which will end up on the export
While this isn't enough ore to cause prices to slump, it
adds to the overall growth in supply, which is widely expected
to overwhelm growth in demand, especially as top buyer China's
economy loses some momentum.
But despite the bearish outlook, the actual pricing for iron
ore, both in the spot and futures markets, is holding up well.
Asian spot prices .IO62-CNI=SI were $113.30 a tonne on
Monday, down 15.6 percent so far this year. But they are up 8.2
percent from the year low of $104.70 on March 10 and 31 percent
above the 2012 low of $86.70, which was the weakest price for
But more importantly than the spot market, the main paper
markets are also showing pricing resilience.
The curve for Singapore iron ore swaps <0#SGXIOS:> has a
good track record of pointing to turns in market pricing.
At the time of the 2012 low in September of that year, the
curve was fairly strongly in contango, with the nine-month
contract trading at a premium of 9.4 percent to the front-month.
At the price peak of $158.90 a tonne in February 2013, which
was the highest since October 2011, the curve was steeply
backwardated, with the nine-month contract at a 15 percent
discount to the front-month.
With the consensus expectation among producers, buyers and
analysts that iron ore prices will struggle, especially when the
new supply starts to hit the market in the second half of this
year, it would be logical to expect the curve to steepen its
In midday trade on Tuesday, the curve was backwardated, with
the nine-month contract at a discount of 7.2 percent to the
However, this isn't much changed from the 5.3 percent
discount that prevailed a month ago, and is less than the 10.4
percent discount from three months ago.
Spot iron ore has been trending lower since Dec. 4 last
year, when the price was $139.70 a tonne, and at that time the
discount of the nine-month swap over the front-month was 11
What the shape of the curve is currently saying is that
while prices for the steel-making ingredient are biased lower, a
significant decline isn't expected.
The curve would have to move more steeply into backwardation
to imply that prices were in for a major correction.
BEARISH ARGUMENTS MORE COMPELLING
This leads to two conclusions, either the market is
incorrectly priced for the downside risks to iron ore prices, or
the outlook isn't quite as bearish as many in the industry
There are reasons why both may be the case.
The bearish outlook is centred on slower demand growth in
China and rising supply from Australia and Brazil.
It now seems more likely that China may struggle to reach
its 7.5 percent target for gross domestic product growth, and
furthermore, the authorities seem increasingly reluctant to pull
the usual stimulus levers of ramping up steel-intensive
This means that Chinese steel demand growth is likely to
moderate, with a flow-on impact to iron ore demand.
This will occur just as major producers are ramping up
Recent production reports from Australia's top miners point
to significant increases in tonnages.
BHP Billiton last week raised its full-year
guidance by 5 million tonnes to 217 million tonnes, while Rio
Tinto is boosting output to 300 million tonnes.
Australia's third-ranked producer, Fortescue Metals Group
, is targeting 41.6 million tonnes in the current
quarter, an increase of 10.1 million tonnes on the previous
Brazil's Vale is aiming for annual output of 360
million tonnes, rising to 400 million in the longer term.
The boost to supply may well run ahead of the increase in
demand, but there are some reasons that prices may not decline
as much as feared.
Firstly, China's imports have remained robust even as steel
output growth has moderated.
Part of this has been put down to the use of iron ore as
collateral for financing deals, but even this may not be enough
to explain the 19.4 percent increase in iron ore imports in the
first quarter over the same period in 2013.
Part of the explanation may be that Chinese domestic iron
ore is increasingly expensive to mine and is suffering declining
ore grades, with the average dropping to about 21.5 percent iron
content from 31 percent 10 years earlier.
Australian and Brazilian ore averages closer to 57 percent
iron, and is easier to extract, giving miners in these two
countries a major cost advantage over Chinese competitors.
This means that even as Chinese steel demand moderates, iron
ore imports may continue to rise as they displace higher cost,
lower quality domestic output.
Using better quality iron ore also reduces pollution from
blast furnaces, and given China's well-documented air quality
problems it isn't hard to see the steel mills being encouraged
to use the best ore available.
While the increasing supply and slower demand growth sounds
the more compelling of the arguments, the downward pressure on
iron ore prices may not be as great as feared.
(Editing by Richard Pullin)