Iron Ore Marketing: on the
cusp of structural change
􀂄 Stronger iron ore prices until 2012: Buy iron ore exposure
We maintain our iron ore price trend: JFY09E +20%; JFY10E +10%; JFY11E 0%.
2012 is our S/D inflection point, so we forecast -25% yoy in JFY12, & another
-20% yoy each in JFY13E & JFY14E to reach our long term price of U$55/t (63%
Fe). Our iron ore price forecasts for JFY09E-11E are +5%, +20% and +41% vs
consensus. For leverage to iron ore we would buy Vale, Kumba, Atlas Iron, Mt
Gibson, & Murchison. We are restricted on BHP Billiton & RIO Tinto.
The iron ore index moves from myth to reality
Marketing of iron ore appears on the cusp of structural change. With at least 3
competing iron ore indices now public (Metals Bulletin, Platts & SSB), & 2 major
global investment banks announcing paper trading for iron ore (CS & DB), the
pricing of iron ore tonnes will, in our view, radically change over the next 2 years.
The prevailing benchmark pricing system seems likely be super-ceded by an
index system that will continue to evolve over the next 2 years, with increasing
volumes of ore sold along the index. For a period of time however, we believe an
index market will run con-current with the benchmark system, given the resistance
of some (especially European) steel mills to accept the transition.
Benefits of an index: increased transparency & liquidity
In our view, an index will result in the creation of a “market clearing price” which
reflects market drivers of both buyers & sellers no matter where the origin of ore.
In addition, the iron ore index should result in increased market transparency, will
compensate producers for better quality ore & improve liquidity for the benefit of
both buyers & sellers. Buyers can still lock in term contracts of 1-2 years to
control costs & sellers can swap out this term exposure along the forward curve to
give themselves index price leverage. We outline our preferred specs in this note.
What about freight premium for Au producers in JFY08
The great freight debate is still active with Australian producers still not settled
with steel mills for JFY08, 3 months after the Carajas settlement (+71%). The
press is speculating that the Australian producers are securing an extra 15%.
BHP and RIO have returned to China and a settlement appears imminent prior to
June 30. We retain our +71% forecast for Au miners in JFY08, but that it is now
likely some premium for freight will be secured this year.
Will iron ore demand hold up with rising Chinese stocks
China’s CFR iron ore spot price has retraced ~10% since April as Chinese port
stocks reach relatively high levels (~70-80mt vs normal 45mt). This could lead to
a slowing in iron ore imports into China over Q3 (after record 43mt in April),
however Indian suppliers will be impacted soon by the monsoon (mid-June to
mid-Sept) so Q3 supply will fall short as well. We are comfortable with our iron
ore import forecast of 439mt for China in 2008.