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2009 iron ore contract prices to fall 20%: Macquarie 
 
WITH the 2009 annual iron ore negotiations just around the corner, commodities analysts with Macquarie Research expect contract iron ore prices to drop in 2009, but not collapse.

In its China(cnmining) Commodities Weekly report, “What next for iron ore?”, Macquarie analysts predict iron ore contract prices in 2009 will be around 20% lower than in 2008.

“We believe it is more important to watch the industry trend rather than to just focus on the current market balance because it is an annual supply negotiation,” the report said.

“In this context, the iron ore contract prices, although apparently under pressure from oversupply, is expected to fall within a reasonable margin rather than to have a sharp correction.”

Analysts noted the weaknesses in iron ore demand had been caused, in part, by heavy destocking, which led to large-scale production cuts across the industry.

“Although there is no doubt that the economy is in a downturn, we believe real consumption of steel in [the second half of 2008] is higher than the apparent consumption,” the report said.

“In [first half 2008], by contrast, the real consumption of steel was lower than the apparent consumption due to heavy destocking (partly to counter the Olympic disruptions).”

The report also noted the sharp cut in steel production was an increasing threat to the Chinese economy.

According to Macquarie, an official from the China Iron and Steel Association said at a recent steel conference that annualised Chinese crude steel production reached only 390 million tonnes for the first half of November – a level the official and Macquarie analysts believed could not support China’s economic growth.

“The Chinese government is still promoting its 8 per cent GDP growth target for 2009, and such a low steel production level undermines this target,” the report said.

Meantime, Macquarie analysts believe production cuts in China were unsustainable for a long period “given the fragmented nature of the Chinese steel sector”.

“The nature of the steel production cuts in China is different from the cuts in other markets,” the report said.

“Overseas, the production cut is more in the form of self-disciplined action; but in China, the production cut was due to the mismatch between expensive inventory and gloomy steel prices.

“However, as soon as steel mills have drawn down their high inventories, they have ramped up production quickly, because higher steel prices combined with the recent falls in coke and iron ore spot prices have made it profitable to restart production … for now.

“We believe that Chinese steel production will reverse its decline in coming months, which should support steel related raw materials prices.”

Macquarie analysts also believe that iron ore delivered by contract will shrink in 2009, with more sales expected to be carried out via the spot market.

Annual iron ore negotiations – which normally take place between December and April – will take place earlier in 2009 because steel mills are asking iron ore suppliers to execute the new iron ore prices on January 1 rather than the traditional April 1.