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28 Nov 2008, by Informa Insights
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ALAN HEAP, Managing Director of Global Commodity Analysis on global iron ore and steel II
More weakness, not just volatility, can be expected in the world iron ore market, according to Alan Heap, Managing Director of Global Commodity Analysis for Citi Investment Research.
All the latest pointers are for further deterioration both within the developed world and critically for the iron ore market within China,” he says in an interview.
“Most worrisome is that as well as deterioration in underlying demand it’s clear there has been a huge inventory build of everything from finished goods including things like apartment buildings, right through to iron ore within China.
“Meanwhile in the developed world the manufacturing side of those economies is also deteriorating rapidly.
“Chinese steel production right now is ‘falling out of bed’ at a tremendous rate.
“The latest numbers are pointing to a 12%-15% decline year on year. Our projections for next year are something like a 5% decline in consumption and underlying production falling by close to 9%.”
Mr Heap says that new suppliers in Australia and Brazil are going to struggle in this environment. A substantial iron ore inventory in China is proving “quite sticky”.
“It’s being whittled away slowly, but only very slowly. That’s going to put further downward pressure on iron ore shipment volumes.
“It remains to be seen what happens to annual contract prices but clearly they’re going to fall. Spot prices have fallen dramatically and then as far as the operations themselves are concerned, most of the major producers now are curtailing production, some more so than others.
“From the smaller companies’ perspective, any company that’s looking to come to the markets for capital, debt or equity, is really going to struggle.
“Possibly the only source of salvation for those small and emerging producers is going to be increased investments from their customers, principally the Chinese steel producers.”
Mr Heap says the world is seeing the early stages of quite a dramatic shift in pricing structures, with two very different tensions occurring.
“At this stage it’s not at all clear how the future pricing structures are going to unfold, but some other commodity markets give us some pointers.
“In the thermal coal market for example, we now have annual contracts, we have a tender market and we have a spot market all running reasonably harmoniously and simultaneously.”
Mr Heap is to address the Global Iron Ore & Steel Forecast Conference in Perth on the 24th and 25th of March 2009.
He will discuss recent work by Citi Investment Research on the shifting competitive landscape in the iron ore industry especially as driven by exchange rates and freight rates.
“The collapse in freight rates in particular has really re-ordered the pecking order on the cost curve, shifting the competitive advantage back towards the international producers interestingly and putting the Chinese producers at an increased competitive disadvantage.
“The second area where we’ve being doing some work is in what we’ve called trough cycle prices.
“If we look at the marginal costs of production and likely margin compression, what does that imply for iron ore prices in the most bearish scenario that we can think of?”
To arrange a media pass, request more information or arrange speaker interviews at the Global Iron Ore & Steel Forecast Conference please contact:
Nigel Dique
Informa-IIR 02 9080 4108; 0423 024 819; nigel.dique@staging.informa.com.au
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