Iron ore price recovery tipped to run into 2013

• by: Sarah-Jane Tasker, Matt Chambers
• From: The Australian
• December 27, 2012 12:00AM

THE recent surge in iron ore prices has taken the market by surprise and a solid run is forecast to continue into next year, with delayed expansion plans, stronger Chinese growth and falling Chinese inventories set to support healthy levels.

Credit Suisse analysts are forecasting iron ore will trade between $US130 and $US140 a tonne for the first month or two of the new year, with the chance of moving higher in the short term, but they warn that any hint of weaker news on the macro front would send a signal for profit taking.

"The price advance has come a bit earlier and a little sharper than we anticipated a few weeks ago," Credit Suisse's head of commodities research, Ric Deverell, said.

Benchmark prices for iron ore landed in China last week surged to a five-month high of $US135.50 a tonne, up 56 per cent from a low of $US87 a tonne in early September but down from a 2011 average of about $US150 a tonne.

"The potential for a break-out into a higher range depends largely on the firmness of China's demand recovery and a marked steel restock, but also on improvement elsewhere," Mr Deverell said, noting improvements in the US steel sector.

"The prospect is there but we would be surprised by a lasting move above $US140."

BC Iron managing director Mike Young said that while the sector had been hit with a "perfect storm" in August and September that drove prices to their lows, a more stabilised price range was now expected.

"When the downturn came in August and September, while the severity of it took everyone by surprise, I said we needed to bear in mind it was being exacerbated by traders because they tend to amplify the effect of iron prices," he said.

"My prediction at the time was that the iron price would settle in the $US110 to $US130-a-tonne range. That is a sustainable price range."

Mr Deverell said macro-economic sentiment in China, where growth is tipped at 8 per cent this year, a drop in iron ore stockpiles at Chinese ports (which hit a two-year low on Christmas Day), and muted production from Chinese mines because of a winter freeze were all supporting prices.

National Australia Bank, in its latest commodity update, said the recovery in iron ore spot prices had been surprisingly strong.

"A temporary dip in prices in late November seemed to confirm our expectation for the recovery to fizzle out as mills restocking came to a close and colder weather slowed construction activity," the bank's commodity team said.

"However, prices quickly recovered, breaking through $US130 per tonne . . . encouraged by the anticipation of more positive signals on policy stimulus from China's central economic work conference."

Mr Young said a key factor in the price stabilising at more sustained levels was the fact that many pricing models did not factor in the supply side, meaning that while there were significant iron ore expansion plans on the horizon, not all targets would be hit. He also said new major export destinations opening up, such as Africa, were unlikely to have an impact.

"Africa as a destination is compelling geologically but politically, it's still Africa," he said.

Mr Young said that while his company had enjoyed success, the barriers to entry were now too great for most juniors to evolve into a producer.

Fortescue's infrastructure cost about $US3bn but, less than 10 years later, Gina Rinehart's Roy Hill project was looking at $US9bn, he said.