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A Rusty Outlook for Iron Ore

A Rusty Outlook for Iron Ore
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Τετ, 8 Ιανουαρίου 2014 - 18:28
Iron ore may have outperformed other commodities last year with record exports from Australia, but the price of the metal used to make steel looks set to decline this year as China's growth slows.
Iron ore may have outperformed other commodities last year with record exports from Australia , but the price of the metal used to make steel looks set to decline this year as China 's growth slows.

 China 's continued use of fiscal stimulus to build subways, bridges and other infrastructure kept demand for iron ore high last year. Exports to China from Port Hedland, Australia 's main shipment point for the metal, increased by 34% to 256 million metric tons last year. Overall shipments of iron ore--including to Japan and South Korea --rose 26% to 318 million tons. Exports of the commodity reached record levels in December.

Many analysts and traders have been surprised by the way iron-ore prices, buoyed by record Chinese demand, held up throughout 2013--largely staying above 130 U.S. dollars a ton while those of other industrial commodities like nickel and coal tumbled.

Although prices are still about a third lower than their all-time peak three years ago, they remain well above the sub-$90-a-ton level they sank to in 2012 as China 's economy stuttered.

"Steel distributors were expecting a pullback in iron-ore prices in the fourth quarter of 2013 as all the capacity ramp-up [occurred] in Australia ," analysts at Barclays wrote in a note. "However iron-ore prices remained strong" due to stronger than expected steel output, they said.

But a less-bright outlook for China's economy this year, coupled with a number of new iron-ore mines coming on line in Australia, is threatening to drag down prices this year, damping the outlook for companies like BHP Billiton and Rio Tinto.

Some commodity analysts are skeptical about the ability of prices to remain near current levels, posing a risk to the earnings of iron-ore producers not only in Australia but world-wide.

"We have our doubts that iron ore and steel prices could sustain themselves at current levels," said Spencer Johnson, a New York-based risk manager at financial-services firm INTL FCStone.

Investment bank UBS estimates iron-ore prices will average less than US$100 a ton in the second half of this year, down from around US$134 currently. RBC Capital Markets, meanwhile, estimates an average price for the calendar year of US$121 a ton, down from about US$136 last year.

Mining companies like BHP, Rio Tinto and Fortescue Metals have poured billions of dollars into new mining operations over the past few years as the value of industrial commodities soared to records on robust demand from China , the world's largest buyer of iron ore accounting for more than 60% of seaborne trade.

Now, a swathe of new supply is likely to weigh on prices.

Rio Tinto has already committed to boosting annual iron-ore output in Australia by more than 20% over the next four years in a bet Chinese demand will stay strong. Fortescue and BHP have also recently opened a number of new mines that will bring additional supply to the market.

The main drivers of the Chinese economy remain government-led projects underpinned by spending on massive new infrastructure like subways and airports.

Still, China 's leadership has pledged to reduce dependence on heavy industry to power growth. Beijing is pushing for production cutbacks among the dirtiest factories and smelters whose emissions are choking China 's cities. Tangshan , a major steel-production center, plans to cut steel capacity by a third over the next four years.

Growth in China 's manufacturing sector has also been losing steam, sparking concern of a deepening slowdown in resources demand in coming years. Two manufacturing surveys last week showed slowing expansion in factory activity.

 Australia 's iron-ore miners remain upbeat on the outlook, however, pointing out that they continue to sell everything they dig up.

Rio Tinto argues it has some of the lowest mining costs in the world, meaning it can still make money if prices weaken. It costs less than US$50 a ton to produce and ship ore from the resource-rich Pilbara region in Western Australia , according to the company, which like others has also been slashing spending on new mining projects to prepare for harder times.

Rio Tinto's iron-ore chief, Andrew Harding , last month said he'd seen a resurgence China 's demand for steel in 2013. Mr. Harding said demand from developing economies such as India would help underpin longer-term growth--although any lifting of India 's current restrictions on iron-ore production could bring even more supply onstream.

The Australian government also expects iron-ore shipments to continue rising even if prices fall. It recently said it expected the nation's earnings from resources exports overall to rise 17% to more than 205 billion Australian dollars (US$183 billion) in the year through June from the previous 12 months.

"There will be a softening of commodity prices, but we see good prospects for Australian export volumes holding up for the foreseeable future," said deputy executive director of the Bureau of Resources and Energy Economics, Wayne Calder.

BHP, however, has displayed more caution. It recently warned that iron-ore may fallout of favor as China transitions from an investment-led economy to a consumption-led one, where metals like copper, used in electronics, would be in greater demand.

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