Iron ore price enters bull market
The spot price of iron ore extended its recent gains on Friday, with the steelmaking material enjoying its best week since 2012.
The 62% Fe import price including freight and insurance at the Chinese port of Tianjin added $3.20 or 5.9% to $57.00 a tonne on Friday, the highest since mid-March and a 12% gain for the week according to data provided by The SteelIndex.
The advance in the Metal Bulletin's benchmark 62%-index at the ports of Qingdao-Rizhao-Lianyungang in China for the week came to 13.5% or $6.88 to $57.81 a tonne. According to Metal Bulletin it's the largest percentage gain since September 2012 when prices were bouncing back from the then long term low of just over $88 a tonne.
MetalBulletin's 58% Fe index performed even better jumping 14% in the week and trading above $50 a tonne for the first time in more than six week.
The iron ore price has now recovered more than 22% since hitting record lows at the beginning of April. A more than 20% appreciation from a low is considered a bull market.
The Big Three iron ore miners – Vale (NYSE:VALE), Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) – announced production numbers on Tuesday and Wednesday showing output growth continuing to climb.
Number three producer BHP also announced that it's pushing out its $2 billion Port Hedland expansion or "debottlenecking" project.
Not because it's paring down production growth to its target 290 million tonnes per year – the Melbourne-based company explained that its already installed infrastructure "continues to exceed expectations" and putting on hold the project means it can slash costs further.
The market nevertheless took that as a sign that the top producers may begin to tackle oversupply which this year is expected to reach 90 million tonnes and only dip to around 80 million tonnes in 2016, the third year in a row of excess production.
The industry was also encouraged by the fact that export growth from Australia – which supplies the bulk of top consumer China's imports – are showing signs of slowing.
The Western Australian hub of Port Hedland, the world's largest terminal for the commodity, came in at 36.6 million tonnes in March a 6% year on year increase, but a slowdown from the torrid pace of expansion above 30% recorded over the past year.
The Sydney Morning Herald quotes fund manager PIMCO's managing director for Australia, Robert Mead, as saying the iron ore price had fallen below its natural "floor":
"The view that we've taken is that iron ore should have a fairly strong floor around $US60 once you get through this period of volatility – and that really relates to the cost curve on the supply side," he said on Thursday.
"Somewhere in that low-$US60 range is where we think the iron ore price will settle."
Other analysts are less sanguine.
The majors continue to cuts costs and make the most of per unit volume savings with the big three able to produce at or below $20 a tonne which according to Goldman Sachs means that other producers are facing an "existential challenge".
CNBC quotes the investment bank's research note released this week as saying up to 50% of tier-two production capacity is at risk through 2019:
"Chinese steel consumption has already overshot and it will contract until it reaches a sustainable rate," Goldman said, noting the demand peak came as iron-ore mining capacity is still expanding.
Goldman also slashed its 2015 to 2018 iron ore forecasts and is now predicting an average of $52 this year, falling to $44 next year and then $40 in 2017 and 2018. The bank's long term prediction sits at $45, 25% below its previous forecast.