Few in the iron ore industry will remember 2014 with any fondness. The steelmaking ingredient was the worst performing major commodity, plummeting 50 per cent as a flood of new supply hit the market and swamped demand.
But it has started 2015 on the front foot with benchmark Australian ore advancing almost 8 per cent since Christmas. The question for the industry is whether this is a dead cat bounce or the start of a recovery in prices, which recently hit a five-and-a-half-year low of $65.60 a tonne.
So far few are convinced the rally will last. Analysts believe the bounce in prices is being driven by restocking at steel mills ahead of the Chinese new year and changes to reserve requirements for Chinese banks. With more supply set to come on line and demand in China weak, many believe prices will come under further pressure this year, even trading into the $50s.
This would be bad news for big mining houses such as BHP Billiton, Rio Tinto and Vale, which have spent billions of dollars expanding operations and generate most of their profits from iron ore.
“We view the upward correction as a similar experience to that recently encountered while climbing Skiddaw (the fourth highest mountain in England) . . . in a gale,” said analysts at Investec Securities in a report. “The climb was accomplished, but ultimately the prevailing wind was so strong that a hurried descent was inevitable.”
Indeed, the late 2014 euphoria has already started to wear off, according to Melinda Moore, analyst at Standard Bank. She says weak Chinese manufacturing data, the end of a key tax rebate on China steel exports and news that home purchase restrictions in China’s tier one cities would not be removed until later in the year all provided a reality check.
“Beijing’s safety checks on construction projects in the city, following a recent school accident, is also expected to impact immediate steel demand, if colder weather and the upcoming Chinese new holiday were not enough already,” she says.
For the rest of this article, click here: http://www.ft.com/intl/cms/s/0/2ee711fe-94f0-11e4-8341-00144feabdc0.html?ftcamp=crm/email/follow/author/Q0ItMDAwMDc3Nw==-QXV0aG9ycw==/product#axzz3OAydsTO3