Iron ore ended a four week run of gains this week as Chinese steel producers lowered their demand, and analysts believe prices will feel the pinch of slower Chinese growth and increased local supply as the year goes on. Over the month of July, iron ore rallied just under 11 per cent as Chinese mills replenished their supplies and increased steel production. However in the past week they have retreated 2.2 per cent to come in below the $US130 mark, still well off their low of $US110.40 at the end of May. According to RBC Capital Market analysts, Chinese steel mills have recently completed their re-stocking efforts, meaning interest for spot iron ore has diminished. This is coupled with weak Chinese manufacturing data and soft steel prices affecting margins in the Chinese steel sector, translating to pressure in the iron ore market. These factors are anticipated to make iron ore pricing somewhat volatile over the next few months.
Economic research consultancy Capital Economics says plans by Australia’s big producers to boost production in 2013 will effect a price drop cause a drop in prices in the second half. Meanwhile, global investment firm ¬Goldman Sachs believes the balance of power has shifted from iron ore producers to consumers, with steel mills steadily becoming ‘spoilt for choice’ in an oversupplied market. They will be more empowered to negotiate rising discounts for grade and impurity levels, placing strain on producer margins. According to Goldman, “As iron ore supply growth starts to outpace demand, buyers are increasingly able and willing to drive the spot price lower by deferring spot purchases and maintaining lower inventory levels than they would have targeted previously.”
Economic news
Manufacturing activity in China has come in better than expected and rebounded over the key 50 threshold separating expansion from contraction. The National Bureau of Statistics and China Federation of Logistics and Purchasing reported a read of 50.3 in July, defying expectations for a read near 49.
Following the official read, the HSBC and Markit China manufacturing PMI has met expectations with as read of 47.7. The privately compiled gauge hit an 11 month low, falling from June's final reading 48.2.
Commentary
FNN spoke to Tim Harcourt, ‘the Airport economist,’ from UNSW, and asked him if he thinks China’s economic slowdown poses a risk:
“People anticipated that China would slow down. China was moving from this position of having too many shippers and not enough shoppers, to a position where they’ve now got to have more shoppers and less shippers, they’ve got to move towards consumption and investment. So we anticipated some slowing of the Chinese economy, but having said that China is still growing at 6 – 7.5 per cent, it’s still good news for Australia.
The Fortescue view
Fortescue Metals Group Limited
(ASX:FMG) Chairman Andrew Forrest says China is growing at a faster rate than ever. A slowdown from double-figure annual percentage rises to below eight per cent in the last year has prompted many economists to warn that the boom is over. But Mr Forrest says 7.5 per cent growth in China in 2013 is larger than a higher percentage would have been in the past because the country's economy is bigger now. Mr Forrest says he’s not worried about future iron ore demand, pointing to 700 cities in China and estimating half of them would need urban railway systems requiring steel and therefore imported Australian iron ore.
Fortescue Metals Group Limited
(ASX:FMG) has had its challenge over the legality of the Federal Government’s minerals resource rent tax dismissed by the High Court of Australia. In its judgement, the High Court says it’s unanimously dismissed claims that some provisions of the mining tax were not valid laws of the Commonwealth. The decision follows a challenge headed by Fortescue Metals Group, even though the company hasn't paid any of the tax as yet.
Fortescue Metals Group Limited
(ASX:FMG) executives are set to be questioned by a liquidator over allegations of trading while insolvent, according to media reports. The allegations relate to when Fortescue's shares were impacted by the falling iron ore price last year, which it is claimed saw the miner terminate an $8 million contract with Fuel-Sys Installations. Lawyers for FSI's liquidator have written to the Fortescue board claiming to have witnesses to a Fortescue executive saying the miner could not make payments on a fuel facility project in the Pilbara.
Other resources headlines
Downer EDI Limited
(ASX:DOW) has posted a solid full-year profit, but flagged more uncertainty for the year ahead, with fewer new major capital works in the resources sector. In the year to June 30, net profit came in at $215.4 million – up 10.3 per cent on last year.
Rio Tinto Limited
(ASX:RIO) has reportedly lost three of the biggest bidders for its 59 per cent stake in the Iron Ore Company of Canada. According to various media reports, private equity firm Apollo, rival Blackstone and commodity trader Glencore have dropped out of the race following the second round of bidding. The timing and the asking price for the sale have both now been questioned, as has the prospect of Rio actually pushing ahead with it.
Karoon Gas Australia Limited
(ASX:KAR) is raising $150 million through an underwritten placement to help shore up its balance sheet amid farmout talks. The underwritten placement is priced at $5.10 a share, an 8.9 per cent discount to the last trading price of $5.60 on August 6. Karoon says the placement will support its rig contract and farmout negotiations as well as fund drilling in the Browse Basin and Brazil's Santos Basin and Peru.
