Metals & Mining

Thu, 12/17/2009 - 16:22

In this week's Interfax guest column, Hu Kai, an analyst with Umetal, discusses the outlook for China's annually contracted long-term iron ore prices in 2010 with the three global iron ore giants Rio Tinto, BHP Billiton and Vale. Translated from the original Chinese by Xu Hong.

Hu Kai

Shanghai. December 17. INTERFAX-CHINA - Thanks to the stimulus packages of various countries, the global economy began to recover in 2009. China's prominent economic position and continuing GDP growth has helped the country bolster the world's steel sector.

Global steel product demand began to rebound in the second quarter of 2009. According to a recent report from the World Steel Association (WSA), this year's global steel product consumption will reach 1.1 billion tons, down 8 percent year-on-year. The expected drop is better than the WSA's previous estimation of 14.1 percent. It also predicts that China's steel product demand will increase by 19 percent to 526 million tons this year.

In October, China's crude steel output hit 51.74 million tons, the second highest monthly output in history, up 44 percent year-on-year. For the first 10 months, China's crude steel output rose 11 percent year-on-year. This indicates that China's crude steel production capacity has already exceeded 620 million tons, and is continuing to expand. Subsequently, it is anticipated that the global crude steel output in 2009 is likely to be in excess of 1.2 billion tons, down just 7.7 percent on an annual basis.

It is also noticeable that the global appetite for iron ore is largely driven by the expansion of China's steel product output, while steel industries in other countries such as those in the European Union, United States and Japan are still struggling. As a result, if these countries ramp up steel production in 2010, the world will likely need more iron ore than ever. In October 2009, the European Union suspended between 30 percent and 35 percent of its steel production capacity, while North America and Japan suspended 30 percent and 13 percent respectively.

Along with China's increasing demand for iron ore, the country depends more on imported iron ore. During the first 10 months of 2009, 70 percent of its iron ore supply was imported, where as that figure stood at 57 percent in 2008. China's domestic iron ore output increased by 6 percent from January to October 2009, while imported iron ore increased by 36.5 percent on an annual basis.

The three major global iron ore suppliers - Vale, Rio Tinto and BHP Billiton - announced third quarter iron ore output volumes of 64.33 million tons, 47.51 million tons and 30.10 million tons respectively. Nearly 141 million tons in total, down 10 percent year-on-year. On the other hand, global iron ore demand in the same period was only 0.7 percent lower than that of 2008, which means global seaborne iron ore supply has been tight over the year.

China's spot imported iron ore prices have been rebounding since the second quarter of 2009. In November, the average reference CIF (cost, insurance and freight) price for Indian iron ore grading 63.5 percent was $106 per ton, a new high for the last thirteen months, up 38.5 percent from the beginning of the year and up 51 percent on an annual basis. The spot iron ore price in December stood at around $24 per ton, or 40 percent higher than the long-term contracted iron ore price.

Since 2004, China's spot iron ore price has been closely linked to annually contracted iron ore prices. Thus I expect the annually contracted iron ore price for 2010 will certainly rise from 2009's level.

According to previous experience, the annually contracted iron ore price does not usually exceed spot iron ore prices. However, it will be different next year, due to expectations of further economic recovery and the prospects of the steel industry. Citigroup and Goldman Sachs predict a 30 percent and 15 percent increase from this year's figure for the annually contracted iron ore prices respectively.

In conclusion, I predict that the 2010 annually contracted iron ore price will surge by 25 percent. Meaning that the FOB price of Australian fine grading 62 percent will rise from $60 per ton to $75 per ton, while the FOB price of the Brazilian fine grading 65 percent will jump from $55 per ton to $69.4 per ton.