Outlook fails to quell ore appetite – by Arpan Muhkerjee (Dow Jones/The Australian – July 16, 2013)


DIRE predictions of slumping iron ore prices and warnings of the end of the commodities super-cycle aren’t deterring some deep-pocketed, long-view investors whose appetite for the steelmaking raw material is driving mining-asset mergers and acquisitions activity from Australia to Canada.

The short-term outlook for iron ore isn’t good.Prices have fallen 12 per cent since the start of the year and are down more than 20 per cent from the high of $US158.90 a tonne in February.

Some see iron ore slumping to $US90 a tonne or less due to rising supplies and slowing growth in top consumer China. UBS expects iron ore to average $117 a tonne this year, while Goldman Sachs has forecast $US80 a tonne in 2015.

“People are looking to buy cheap assets, so this is the perfect time when the downside (in prices) is still there,” said Helen Lau, senior analyst at UOB KayHian in Hong Kong. “Investors are able to negotiate even cheaper prices with miners.” Also weighing on prices is likely future iron ore supply rises.

Rio Tinto, Australia’s biggest iron ore exporter by volume, is pushing ahead with an expansion of output in the ore-rich Pilbara region.

India, until recently the world’s third-ranked iron ore exporter, has seen foreign sales slump due to mining bans in two states, one of which has now been lifted.

The raw material slide has been mirrored in the share prices of big iron ore miners Rio Tinto, BHP Billiton and Fortescue Metals Group, whose shares have fallen 17 per cent, 10 per cent and 25 per cent respectively since the start of January.

Pension funds, known for 20 to 30-year timeframes when making investment decisions, are among potential buyers for some large-scale iron assets, said Kelly Teoh, strategist with IG in Singapore, a broking house that specialises in derivatives trading.

“People are talking about the commodity super-cycle being over, but commodities will always have a place in society because if you look at global population growth, we are reaching unprecedented levels,” said Ms Teoh.

Canada’s two largest pension funds — CPP Investment Board and Caisse de depot et placement du Quebec — are seeking possible partners for separate bids for Rio Tinto’s 59 per cent stake in Iron Ore Co of Canada, which is being put on the block as part of Rio’s efforts to shed non-core assets.

Others who have shown interest in the stake, which could be worth up to $US4 billion ($4.4bn), include private-equity firm Blackstone Group, The Wall Street Journal has reported, and state-controlled China Minmetals.

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