Why iron ore won’t rebound any time soon

Photo: Live Mint

[Editor: On the contrary I ask CNBC.Com's Leslie Shaffer (Yoga teacher); as why every analysis has to exclude India (and talk only of China, when it comes to steel), which is the fourth largest steel producer in the world? The Financial Portal, Live Mint writes on January, 04 2015:

India will import nearly 15 million tonnes of iron ore in 2015 as higher domestic prices amid a supply shortage push top steel makers to import more, said industry executives. Goutam Chakraborty, analyst with brokerage Emkay Global Financial Services, said the current price of 62% Fe grade iron ore is about Rs.4,000 per tonne in India; the same grade is available internationally at around Rs.3,500 per tonne. He added that the cost of iron ore is even higher in India in case of lumps and is close to Rs.4,200-4,500 per tonne for a 62% Fe grade. Seshagiri Rao, joint managing director and group chief financial officer of JSW Group, added that while international prices have fallen almost 40% since the beginning of the fiscal, in India, prices have actually risen.Bloomberg data says the price of 62% Fe grade iron ore fines imported into China has fallen from $110.1 per tonne as on 1 April 2014 to $66.4 per tonne as on 25 December 2014, a fall of almost 40% so far this fiscal. In contrast, ore price at e-auctions in India has risen from Rs.2,700 per tonne in April to Rs.3,140 per tonne in November. State-owned miner NMDC Ltd cut prices in December for the first time in 2014, said Chakraborty of Emkay in a 2 January report. Data on the quantum of the price cut was not available.

Leslie Shaffer, CNBC

Meanwhile, there were media reports that the domestic Iron Ore Production, which recorded a marginal growth to touch 140 million tonnes (mt) in 2014, is expected to touch 150-155 mt in 2015. This is possible as more mines would start operations in Karnataka, Goa and Odisha in the coming months. The domestic iron ore production is likely to see a modest 10 per cent growth this year. The mining industry is looking forward to some positive developments in 2015. The renewal of leases in Goa, formation of new government in Jharkhand, issuance of clearances and permits in Odisha and restarting of mines including auction of Category-C mines in Karnataka are expected in 2015. With the global prices of iron ore hitting their low in the recent months, the steel industry is likely to continue their imports in 2015. India is expected to produce up to 130 million tonnes per annum (mtpa) of iron ore as against a demand of 140 mtpa largely due to weaker output from Karnataka, Odisha and Jharkhand. Domestic output has fallen due to restrictions imposed by the Supreme Court to curb illegal mining.

So, on what basis,  Leslie Shaffer comes up with such blanket forecasting on Iron Ore? And when will these Western Analysts get over with their China-hangover?]

Photo: Business Standard

Economists may teach that low prices and declining demand encourage producers to decrease supply, but the iron ore industry appears to have skipped class that day.

"The combination of a further increase in global iron ore supply this year and only subdued demand growth suggests iron ore prices will continue to drift lower," said Caroline Bain, an analyst at Capital Economics, in a note Monday. She forecasts iron ore prices at $60 a tonne by year-end, with risks to the downside. Iron ore touched a more than five-year low Monday of around $63.30 a tonne, although some forward contracts are already pricing it under $60.

Output has picked up over the past few years, encouraged by expectations China demand would continue to post strong growth and by low production costs in Australia and Brazil, she said. She noted Rio Tinto and BHP Billiton put their average production cost in Pilbara, where most of Australia's iron-ore production is located, at around $25 a tonne, compared with 2010-13 average market prices at $145 a tonne. Even at current prices, these producers are still profitable, Bain noted. Australia is the world's second-largest iron-ore producer after China.

Despite 2014's around 50 percent decline in iron ore prices, the big four producers -- Vale, Rio Tinto, BHP Billiton and Fortescue – continue to expand production and other companies are also bringing projects on line this year, she said, forecasting Australian production will rise 6 percent this year, although that's down from 2014's 20 percent rise.

Don't count on China

At the same time, despite China producers' higher costs and lower ore grades, production there isn't likely to see much slowdown, especially as many steel plants have "vertically integrated" operations, owning mines nearby, Bain said. Closures on the mainland are likely to focus on less efficient operations, leading to a leaner and meaner industry there, she said.

 "The multinational producers will be only partially successful in their bid to oust higher-cost producers globally and oversupply will continue to weigh on prices," she said. At the same time, China's iron ore usage will stagnate at best, hit by a combination of high inventories and lower demand to use the metal as part of financing deals, she said.

Goldman Sachs also expects iron ore producers won't be able to count on China for growth, noting it's become a mature market.

"The decade-long love affair between China and iron ore is cooling. Chinese steel consumption has increased to unsustainable levels and is bound to decline," it said in a note Friday. "Significant overinvestment to date will ensure that the market is well supplied."

It expects a "long war of attrition" will be needed to balance the market, cutting its long-term price forecast by 25 percent to $60 a tonne.

The oil effect

Falling oil prices are also set to weigh on iron ore prices, as they result in "substantial cost reductions", and commodity prices are likely to fall to meet these new lower levels, Citigroup said in a note Monday.

It's also concerned about oil-fueled deflationary pressures affecting commodity demand. 

"Falling prices increase the real cost of debt repayments and could see increased defaults. This not only affects direct commodity demand, but also drives lower inventories and threatens commodity financing trade," it said, noting that falling commodity prices also leave companies with little incentive to build up inventories.

In a note earlier this month, the bank cut its 2015 iron ore price forecast to $58 a tonne from $65.

Courtesy: CNBC