Iron ore contract prices to drop, Standard Chartered says

Contract prices for iron ore will fall 15-20% in 2009, according to the commodity research team at Standard Chartered.

 

The spot price for Indian fines (63.5% iron) has plunged 50% since the third quarter and the domestic price for fines (66% iron) in China’s northern province of Hebei have dropped by 30%, the bank stated in a Nov. 20 research note to clients.

 

This year the contract price for fines produced by Vale’s Southern system was around US$74 per tonne, 13%-18% lower than Australia’s Rio Tinto fines of similar quality, it added.

 

Standard Chartered warned that China’s iron ore imports “may plummet” in the fourth quarter. For the first time in eight years, steel consumption fell 4% year-on-year in September on a three-month basis, while mills and trading houses were reporting 50%-90% drops in buying by U.S., European, and Asian customers over the past few weeks, the report noted.

 

The bank also said that the surplus from the export market has flowed back into the domestic market and steel producers are cutting prices. Domestic inventory is about 150 million tonnes of steel or 30% of this year’s total production. (Fixed asset investment growth in real terms in the third quarter fell to 13%, down from 21% in the same quarter last year.)

 

China makes up about 60% of world demand for iron ore and produces about 40% of the world’s crude steel. 

 

In the northern province of Hebei – the industrial heartland of China – anecdotal evidence indicates that about half of the steel mills have closed due to bankruptcy, Standard Chartered analysts wrote.

 

One early warning signal of more pain to come is that the number of seaborne vessels that have been booked is “much lower” than in the third quarter, Standard Chartered argued.

 

Another sign is that China’s iron ore inventories at its seaports have climbed by 27% since the end of September. As of Oct. 15, the   reached 89 million tonnes – equal to more than two months of iron ore imports.

 

“Inventories at mills are equivalent to four months of usage,” Standard Chartered noted, quoting an unnamed senior industry official in Beijing.

 

The research note also pointed out that it was unclear when China would resume imports from Brazil’s Vale (RIO-n) after they were terminated in September due to disputes over price.

 

“The latest development is that Vale has withdrawn its request for a 12% hike in the 2008 iron ore contract price,” the research note explained, “but there has been no word from China on whether buying will resume in the coming weeks.”

 

Even if shipments from Vale resume, it will take eight weeks for the metal to reach China’s coastline.