Seasonal restocking and increased EOFY Chinese credit availability in parallel with boosted second half production in Australia have seen the iron ore price tap two month highs in the past week, ascending 3.5 per cent to $US126.80 a tonne. This represents its highest level since the middle of May and a 13.4 per cent increase since the beginning of June. However the iron ore price is 13.6 per cent down on its level from the start of the year and the recent rally isn’t expected to be the beginning of a significant recovery according to RBC Capital Markets, who tip the iron ore market to remain volatile as the global economic remains subdued in the short term. RBC believes the increase in Chinese credit availability has encouraged boosted demand from steel makers and an ensuing boost to steel prices which will give way in the September quarter as seasonal demand weakens. Following that, the iron ore price is tipped to continue to sink over the next two years as oversupply results from expansion and production upgrades among some of the major miners, headed by Rio Tinto Limited
(ASX:RIO) which is pushing forward with an output expansion in the Pilbara region. Despite bullish plans such as these- supported in the short term by decreased production levels in Brazil and India which are tipped to aid a 16 per cent rise in Australian iron ore exports this year- prices are expected to be pushed down sooner rather than later by production exceeding demand.
Economic news
China's economy expanded in line with expectations in the June quarter, according to the statistics bureau. China's gross domestic product (GDP) came in at 7.5 per cent in the quarter, down slightly from the previous quarter's 7.7 per cent, but in line with the official government target for the year.
The Reserve Bank of Australia released its board meeting minutes for July, and the mining sector was in the crosshairs. According to Governor Stevens and the RBA, the hold call was made partly because:
• The outlook for both mining and non-mining business investment remained uncertain
• Mining investment was likely to remain high for some quarters given the considerable volume of firmly committed work.
Commentary
FNN asked Tim Schroeders, Portfolio Manager of Pengana Global Resources, for his view on the performance of the commodities market in 2013:
“I think we’re going through different iterations in the market at the moment, commodity prices have been moving lower, expectations and blue sky have been priced out of the resources sector, and the yield portion, or yield at any cost play at the market is coming to an end, so I do see a rotation back into resource stocks in the second half of the year as people become more confident on the US recovery and China’s new leaders provide some new economic stimulus, and we’re likely to see that sometime in the second half of this year with an urbanisation package announced.”
Production season
Rio Tinto Limited
(ASX:RIO) says its cost cutting drive remains on track and has reaffirmed its full year output guidance after boosting its second quarter iron ore production by 7 per cent to 51.82 million tonnes. The global miner expects to hit 265 million tonnes for the full year barring weather constraints, and is on track to meet a $750 million targeted reduction in exploration spending for the calendar year.
Also this week:
Rio Tinto Limited
(ASX:RIO) began coal production at its $US2 billion Kestrel Mine Extension in central Queensland. The Kestrel Mine is Rio’s only underground coal operation and the extension will add 20 years to the mine life.
BHP Billiton Limited
(ASX:BHP) has missed its full-year iron ore production guidance despite posting a strong lift in fourth-quarter activities. In the three months to June 30, BHP's iron ore output was 47.689 million tonnes, a 17.7 per cent lift on the previous corresponding period. Year-to-date iron ore production came in at 169.85 million tonnes, a seven per cent increase on year. During its third-quarter production update, BHP flagged full-year iron ore production of 183 million tonnes, despite noting a cyclone related slowdown in the period.
AngloGold Ashanti Limited
(ASX:AGG) says full-year production and second-quarter earnings will come in lower than expected, even though second-quarter production was in line with expectations. The world’s third largest gold miner has lowered its full-year guidance for 2013 to between 4 million and 4.1 million ounces, from between 4.1 million and 4.4 million ounces.
Newcrest’s winter of discontent
Newcrest Mining Limited
(ASX:NCM) will cut an unspecified number of workers at its Telfer mine in Western Australia. The miner has reportedly held meetings with the mine's fly-in, fly-out workforce informing them cuts would come in the next six to 12 months. Newcrest, which has been hit hard by falling gold prices, earlier cut 250 jobs in Brisbane and Melbourne, as well as 150 staff in Papua New Guinea.
Newcrest Mining Limited
(ASX:NCM) has been further destabilised after Perennial Investment Partners sold its stake in the miner. Perennial's stake in Newcrest was reportedly worth about $100 million in November, but was reportedly only worth about $40 million when sold. Perennial told investors it was no longer confident Newcrest could grow cash flows from current levels.
WorleyParsons Limited
(ASX:WOR) has won a contract from Sasol North America to work on a chemical plant in Louisiana worth as much as $21 billion. Under the contract, WorleyParsons will provide services to the front-end engineering and design phase, with intent to also work on the engineering, procurement and construction phase of the project.
Kingsgate Consolidated Limited
(ASX:KCN) has been given the go-ahead by the Chilean Government for its gold and silver mine in the Atacama region. Kingsgate says an environmental impact assessment submission for the project has been approved, but the feasibility study is still being completed. The miner says it remains confident the project will continue to advance despite the volatile metal price conditions.
By Joel Spreadborough
