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Must-know: Factors driving the price outlook for iron ore
At the end of the day, underlying demand must drive the recovery if it’s to be sustained. Government stimulus measures might not be able to propel recovery beyond a certain point.
If BHP does indeed reach this unit-cost level, it’ll become the lowest-cost supplier to China. Rio Tinto (RIO), which is the lowest-cost producer currently, has a cash cost excluding freight and royalties of $20.4 per ton.
Rio Tinto released its third-quarter production report on October 15. The company’s aggregate iron ore production increased by 12% year-over-year to 76.8 million tons.
“Backwardation” occurs when futures contracts trade below the spot price, and the futures curve begins to downward slope. This means that the market expects further decline in iron ore prices based on current indicators and fundamentals.
Home sales have picked up in China since banks started loosening lending rules in August. Housing sales in China in the first nine months of the year jumped 34.5% year-over-year, to 4.54 trillion yuan.
Aggregate financing is China’s broadest measure of new credit and liquidity. It came in at 1050.0 billion yuan in September, up 9.7% month-over-month and down 25.6% year-over-year.
Japan has not taken advantage of lower iron ore prices, which are down ~38% in the year to date. Japan’s steel output is up 2.2% year-over-year and 0.5% month-over-month, in August.
According to the monthly data released by the National Bureau of Statistics, industrial output, or factory production, in September increased by 8.0% year-over-year, compared to 6.9% in August.
One positive data point isn’t enough to suggest a sustained increase in the end-demand. Even at these levels, domestic production can’t keep pace with the increasing supply from the four major players.
The sub-index for manufacturing employment shrank for the 11th consecutive month. Overall, the data suggest that manufacturing activity is expanding but at a slow pace.
Since China consumes two-thirds of seaborne iron ore, tracking China’s steel demand is a must for investors who want to get the iron ore demand drivers right.
Although inventory has fallen since the previous week, it remains at quite elevated levels compared to the long-term average. In fact, it’s still near the record levels of 113.70 million tons reached in early July.
Higher exports in an already oversupplied market is bad for iron ore players engaged in seaborne trade—unless there is a corresponding increase in demand.
High volumes are mainly the result of production ramp-up by two major Australian players who ship out of port Hedland, BHP and Fortescue Metals Group.
Of all the world economies, China consumes the most iron ore and is responsible for about 60% of seaborne iron ore imports.
Cliffs Natural Resources’ (CLF) coal and eastern Canada iron ore divisions are burning cash. This is a result of the depressed pricing environment for coal and iron ore.
Market analysts have started turning bearish on Cliffs Natural Resources (CLF). There are many downgrades. The target price has been revised down in recent weeks.
Iron ore’s demand dynamics are getting worse for China and Japan. This will put pressure on the realized prices for Asia Pacific’s iron ore shipments.
Iron ore operates two mines in eastern Canada—Wabush and Bloom Lake. The Wabush mine was idled in 1Q14 due to high costs. Bloom Lake became a drag on the already depressed earnings.
U.S. iron ore could navigate through a weaker pricing environment. However, reassessing prices in 2015 would put downward pressure on margins.