The price of iron ore has surged over three per cent overnight as investors shrug off a wave of pessimism that led Fortescue Metals Group to a new six-year low in local trade yesterday.
At the end of the latest session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US48.80 a tonne, up 3.2 per cent from its prior close of $US47.30 a tonne and now well clear of the 10-year low of $US46.70 reached a week ago.
The surge, which may amount to yet another dead cat bounce within a long-term bear market, came despite forecasts being cut by analysts and the federal government alike and as the World Bank cast renewed doubt on the strength of the Chinese economy.
Treasurer Joe Hockey yesterday warned the budget may factor in an iron ore price of $US35 a tonne for the coming year, a number well short of the government’s previous forecast of $US60 a tonne.
It would appear Treasury is keen to take a cautious approach and ensure it doesn’t over-estimate the likely receipts from miners in the budget, though this was the expectation when the government went lower than many analysts in predicting a $US60 a tonne price last December.
That number held very briefly before negativity again gripped the market as suppliers continued to ramp up production and Chinese data showed signs of weakness.
Analysts, too, are racing to get their numbers right, with Citi the latest to issue a sharp downgrade to pricing expectations. The investment bank said it now expects prices to fall as low as $US35 a tonne before a recovery is seen, with average prices of $US36 a tonne in the third quarter and $US38 a tonne in the fourth quarter of 2015.
For the full year, Citi tips an average price of $US45 a tonne, well shy of its previous forecast of $US58 a tonne.
The dire outlook led the bank’s analysts to slash its forecast for Fortescue stock from $2.20 a share to just 70c. The staggering revision came as Fortescue stock slumped to a fresh six-year low of $1.78.
“Fortescue should have taken debt when it could as the window may have now closed, leaving either sale of infrastructure, operating assets or equity raising as options to fund debt repayments in 2017,” Citi analysts said in a report.
The revisions are being driven by a rampant oversupply that shows no signs of resolving itself soon as leading producers press on with plans to ramp up supply.
The strategies of the likes of Vale, BHP Billiton, and Rio Tinto have been the subject of much debate, with West Australian Premier Colin Barnett again weighing in yesterday with criticism of the tactics and a warning the state may not be friendly to future expansion plans.
“They should reschedule some of their production and give a signal to the market that yes, we’ll cater to iron ore demand and we’ll cater for growth, but we’re not going to flood the market,” Mr Barnett told Bloomberg.
“If Rio and BHP come to me in the future, they will have to seek rights to expand their projects. I might say ‘yes’, I might say ‘no’.”
While the supply side is drawing much of the spotlight, the demand side is also in focus as growth stutters in China. The latest evidence of faltering growth came with news imports to the world’s second largest economy slumped over 12 per cent in March and as the World Bank warned the pace of expansion in China would slow in coming years.
“In China, as it shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run,” the World Bank said.
Chinese growth may ease from 7.4 per cent in 2014, to 7.1 per cent in 2015, 7 per cent in 2016 and 6.9 per cent in 2017.
The London-listed stock of both BHP and Rio slumped in offshore trade, with falls of 3.3 per cent and 0.8 per cent respectively, despite the rebound in the iron ore price. The weakness was likely related to reports the two firms will be forced to either cut their dividends to shareholders or further trim capital expenditure should prices fall any further.
The two mining heavyweights are among the rare few iron ore miners still making a profit at levels around $US45 a tonne.
Source: Business Spectator
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