2007 Iron Ore Price Rise Consensus at 8% - China Looks for Drop in Balanced Market

---

Written by Richard Finlayson Senior International Editor for Industrial Info Resources (Sugar Land, Texas). You know that you are in the second half of November when the Christmas decorations go up in the malls and the Brazilians, Chinese, Australians and Japanese start going into ‘rounds of talks’ on the level of the iron ore price for the next year. The talks will go on well into the first quarter of 2007 and some level of finality should be appearing by the end of February. Currently, it is not surprising that the buyers of iron in China, Asia and Japan are expressing good reasons why the price will not go up after a 71.5 % increase in 2005 and a 19% increase in 2006. The major sellers of the ore, Brazil and Australia, with India and South Africa, are managing to see natural pressures in the market that give them a rising feeling.

Although steel and iron production volumes obviously have the major direct influence on the ore market, both sides are holding back on steel statistics a little until the figures for 2006 are in and the game starts in earnest in January. If projections and estimates for 2006 are correct, they will see that total world steel production has gone up about 9.5% year on year and has hit 1.237 billion tons. MEPS International reports that in the seven years since the end of the last century, iron and steel production will have expanded by around 446 million tons, a rise of 57%, which equates to an average annual growth rate of 6.6%. At the end of the last decade, Asia represented 39% of global output, and in 2006, its share had risen to 53% and is forecasted to rise to 58% in 2010.

Against some predictions in mid-2006 of falling demand in 2007, and encouraged by some wrist slapping by the Chinese authorities to put abroad the idea that production would be curbed, MEPS production estimates have Asia producing 660 million tons of steel this year with blast furnace iron production contributing 551 million tons (up 74 million tons) and this output will come mainly from the blast furnace/oxygen process with China as the main driver.

At the end of October, a senior Chinese Commerce Ministry official, Lu Jianhua, said that international iron ore prices are likely to drop next year as supply and demand are reaching a balance. He expanded on this sympathetic concept of market harmony with, “The international iron ore prices will be more reasonable because the supply keeps growing and demand is slowing down.”

Although the growth rate for imported iron for the first nine months of 2006 is up, 24.2% year on year at 247 million tons, the rate is seven points lower than last year. “It is the first time that figure has been below 30% since 2003,” Lu said. He predicted that China’s iron imports would slide 12% for the year and would total 320 million tons. (Growth at 24.2% and a ’slide’ to 320 million tons is hardly dismal economics) Lu reported that in the first nine months of 2006, Chinese steelmakers paid an average $62.7 per ton of iron ore, which was 7.2% lower than the same period in 2005.

The battle was joined in mid-November, at distance, when CVRD (NYSE:RIO ) (Rio de Janeiro, Brazil) Finance Director Fabio Barbosa said consultants forecasted a 13% average growth for Chinese steel production in the 2006-2012 period and that CVRD iron ore shipments to China increased by 40% this year. Most of CVRD’s 300 million tons of exports went to China. He also told industry analysts that China’s domestically-mined ore lost ground and added that one ton of local ore generated an estimated 10 tons of waste and tailings, meaning that import substitution did not seem to be an option for China.

Lu had said in October that domestic iron ore production could partly replace imports and that in the first nine months China’s ore production had gone up 37.7% to 406 million tons.

Industry pundits are agreeing with Lu’s market harmony concept leading to no price increase, but at the same forming a consensus somewhere around a 6% to 8% rise. They agree in the main that CVRD can supply the needs of all its markets and that the company is in a long-term relationship with China so the heat could really pass from the ore price in the coming year. The same sort of scenario could obtain for the Australian miners relationship with the Japanese steel market where relationships are well established. The growing Chinese inventories of ore, which would cushion price rise pressure, are set against the gorilla of Chinese growth, which has ripped through many calming predictions in the past. A few risk a prediction of a 10% plus price rise because of this. Meanwhile, the Chinese, as the leaders of the buyers group, have rationalized representation on Shanghai Baosteel and the sellers are taking the lead from CVRD with the Australians chirping strongly, as usual, to keep the players alert.

While delivering his opinions on the ore price, Barbosa of CVRD gave a market perspective for the future when he said that the Middle East is becoming the latest boom region with dramatic growth in investments, construction and industrial capacity in Saudi Arabia, UAE, Kuwait, Oman, Qatar and Bahrain. He predicted that Indian iron ore export growth would lose steam to the requirements of its own expanding domestic steel industry.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.