The price of iron ore is headed back to historic lows as the world's biggest producers ramp up supply against a slowing Chinese economy.
This is the view of the head of investment strategy at investment bank UBS, David Sokulsky.
He said on Thursday this week's deal between the Chinese government and Brazilian giant Vale do Rio Doce reflected both the determination of Beijing to diversify supply sources and of large producers to step up output to shake out smaller and less efficient mine operators.
Chinese officials this week agreed to invest in Vale's fleet of huge ore carriers and extend loans to the company to help fund a $US16.5 billion ($20.8 billion) mine expansion.
Vale, the world's largest iron ore producer, last year accounted for 18 per cent of the supply to the Chinese market, compared with nearly 60 per cent by Australian producers, dominated by Rio Tinto and BHP Billiton.
China's investment in Vale was part of a broader state strategy to invest directly in emerging markets to shore up supply of commodities, Mr Sokulsky said.
"Now they can say 'we support our domestic market, we're making sure Brazil is a viable alternative and we can still get our iron ore from Australia'," he said.
Mr Sokulsky said a recent bounce in the price of iron from historic lows would not last, as the original imbalance between supply and demand reasserted itself.
"All the factors that have driven the price of iron ore down over the last year we tend to think are still there, and this pop in the price is very transitory," he said.
The price of benchmark iron ore was last fixed at $US57.12 a tonne, compared with an all-time low under the current pricing regime of $US47.08 a tonne last month. At its February 2011 peak in the current cycle, the metal was fetching $US191.70.
"In terms of the iron ore price, we've obviously seen a pretty significant strengthening [since the low]," Mr Sokulsky said.
"We've seen the stockpiles come down in China; a lot of that's a reflection of the Chinese [interest] rate cuts.
"Some of that is a reflection of some decreased output, from Australia as well.
"But if you look . . . [at] those things, they certainly appear to be temporary," he said.
He said despite recent monetary expansion, China's growth rate would continue to slow, from about 7 per cent now to 6.5 per cent next year, as investment, consumption and exports slowed.
This would further undermine the demand for steel and, therefore, iron ore.
Despite this, Vale, Rio and BHP all had plans to ramp up production, he said, while China propped up its domestic producers.
"The Vale numbers that have come out suggest there's going to be a lot more production," Mr Sokulsky said.
"BHP and Rio look like they're going to start increasing production in the second half of this year.
"If we do see a slowdown in the Chinese economy, which we think there will be – a marginal slowdown – again we think that's going to reduce demand.
"So this temporary spike is just that: we think it's very temporary, and over the next six to 12 months that should reverse and probably settle at a price around the $US50 mark."
Source: Fairfax Media Australia
- metaljunction »
- Metal News
Metal News & Events
METALJUNCTION PUBLICATIONS
Coal Insights (English) Monthly
Coal Insights is a ready reckoner for anyone associated with coal. This publication is aimed at tracking everything related to coal in India.
India Coal Market Watch(English) Monthly
ICMW is a one-stop source for all news, data and research pertaining to coal demand, consumption, stocks, spot- and long-term prices with respect to the Indian Market.
India Steel Market Watch (English) Monthly
ISMW is a brand new high-end steel market report, covering all aspects of the steel industry in India.
Steel Insights(English) Monthly
Steel Insights delves into various facets of the domestic and global steel industry such as market fundamentals, raw material price trends, price forecasts etc.