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Iron ore: the good, the bad and the even worse

ANYONE watching for signs of a turnaround in the iron ore market would be heartened by rising Chinese imports and higher spot prices out of India for the commodity - but there's still plenty of bad news hanging around.

First, the good news. In November, Chinese(cnmining) iron ore imports actually rose 6.2% from October’s levels to 32.52 million tonnes.

However, according to analysts at Macquarie, this was down 8.3% from the same period in 2007.

Macquarie attributed the rise in part to under-reporting in October due to national holidays in China, but said the numbers do go along with a surprise recovery in iron ore exports from India, with figures suggesting spot buying has restarted from the country.

The bank noted reports suggesting spot prices had reached $US69 per tonne cost and freight (CFR), up from a low three weeks of around $53 CFR.

However, on the less positive side, Macquarie said it was clear steelmaking trends remained bearish, with steel exports from China falling a further 36.1% in November.

“The fall in Chinese net exports has been dramatic in recent months from a peak of 81 million tonnes annualised in August to only 17 million tonnes annualised in November,” the bank said.

As for the spot iron buying, Macquarie also had some words of caution, saying buyers continue to bypass the still large stocks of iron ore at Chinese ports.

This could be a strategy on the part of the steel mills to build a large iron ore overhang, but Macquarie said it was more likely that Chinese mills were reducing purchases on benchmark priced related ores in expectation of lower prices from April 1.

In the meantime, spot iron remains cheaper than benchmark priced contracts.

While the lift of spot prices is a small piece of good news, other information about the state of world demand for commodities like iron ore is also worrying.

The World Bank this week released its own extremely negative economic forecasts suggesting the slump in metal prices would continue in 2009, and prices would be on average 29% lower next year than in 2008.

Given the precipitous slide in metals prices already this year, this is not a cheery thought for Australian miners or explorers.

The World Bank is predicting iron ore prices will fall to, on average, US91c per dry metric tonne unit next year, then 79c/dtmu by 2010 and as low as 52c/dtmu by 2011.