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ANZ Commodity Insight Iron ore Jan13.pdf

ANZ Commodity Insight Iron ore Jan13.pdf

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Published by: Belinda Winkelman on Jan 30, 2013
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30 January 2013
Iron ore prices vulnerable to furtherselling leading into the Chinese New Year
Weaker freight rates in December flags abig drop in Chinese iron ore imports inJanuary
And negative steel mill margins is seeinga swing to cheaper domestic iron ore
Despite a 6% fall iron ore prices in the past threeweeks, we think the ensuing Chinese holiday breakis likely to put further downward pressure onseaborne prices over the next few weeks. The recentQueensland floods could also convince traders toshort iron ore, to offset any margin loss by steelmills from a spike in coking coal prices. We thinkprices should trend down to USD140/t CIF China bythe end of the first quarter - still a palatableoutcome for both consumers and suppliers.The sharp drop in Baltic Capesize freight rates inDecember (down 45% over the month) flags asubstantial drop in Chinese iron ore imports inJanuary after record high levels in December. Wealso hear that steel mills have built steel yard ironore stockpiles up to around 32 days of cover, from26 days in November. An ample level of cover in theChinese steel industry is seen around 30 days.We also hear that steel mills are buying a higherlevel of cheaper domestic iron ore, with the ratio useincreasing to 84/16 from 80/20 (domestic/importedore) in the past month. Reports that the Chinesesteel industry operated at a -0.18% EBIT margin for2012 doesn’t surprise us that participants arechasing cheaper raw material supply.On a price-supporting side, iron ore port stockscontinue to fall. Chinese inventories at major ironore ports now sit at 69.3 million tonnes, down froma high of 96 million tonnes in early September lastyear. That said, the stockpile declines last year looklike inventory rebuilding by steel mills, while thefalls in the past month look more likely to beassociated with lower importing activity - suggestingthat the tighter supply backdrop is not necessarilyindicative of better prices.It appears trading is already starting to wind-downfor the Chinese lunar New Year (in a weeks time).The recent pick-up in prices looks like last minuteinventory adjustments, rather than a start of arebound. That said, we remain upbeat on theoutlook for iron ore from the second quarter, asfurther government stimulus and improvingeconomic data confirms a better China growthoutcome. We think spot prices will ultimately traderange-bound between USD130-150/t for 2013.
Mark PervanGlobal Head of Commodity Strategy
Melbourne+61 3 8655 9243Mark.Pervan@anz.com
8090100110120130140150160J F M A M J J A S O N D J520540560580600620640660680700Spot Iron ore China rebar (RHS)USD/t USD/tspread blowout
 Source: Bloomberg, ANZ Commodity Strategy
1,0001,2001,4001,6001,8002,0002,2002,4002,6002,8003,000Jan-12 Apr-12 Jul-12 Oct-12 Jan-138090100110120130140150160Capesize Iron ore price (RHS)USD/tpoints45%
 Source: Bloomberg, ANZ Commodity Strategy
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