Some economists believe Chinese demand will support the Australian economy for longer than sluggish 2014 forecasts for the steel making commodity may suggest, a position also supported by sustained resilience in the iron ore price. Despite expectations that increased output and seasonal weakness would weigh down the price towards the end of the year, Iron ore remains at a healthy price ($US138.20 per tonne on Wednesday Dec 4) and has remained strong within the range of $US130 and $US140 per tonne in recent months.
Rio Tinto Limited
(ASX:RIO) and Vale, the two biggest iron ore producers on the planet, have issued a robust outlook for Australia’s largest export commodity in the face of Chinese demand surpassing expectations at the same time Chinese domestic mines are experiencing rising production costs greater than other producing countries. Meanwhile, UBS forecasts are tipping that a 130 million tonne supply surplus of iron ore is set to arrive on the market in 2014, owing to production increases chiefly by Australian producers.
According to Michael Workman, a senior economist with the Commonwealth Bank, forecasts of a 10-20 per cent lower than current iron ore price are incorrect, given the price has retained higher levels than people had deemed possible. “The market tended to be sharply divided six to nine months ago on the outlook for China’s activity levels and the flow of data recently has confirmed that this year, and as it looks for next year, China will achieve its targeted growth rates. That’s been pretty assuring for the market,” Workman says.
Just this week, HSBC’s own take on the health of Chinese manufacturing showed output and total new orders increased at the fastest rate in eight months. Export tonnage is already up 20 per cent on a year ago for iron ore, according to CBA. “Iron ore is our single largest goods export now and will remain so for many years, so any shifts in the prices outside of the market views here do have an effect on people’s perceptions about the growth outcomes for the economy and the profitability of the major players,” Mr Workman said.
Economic news
The Reserve Bank offered few surprises, keeping interest rates on hold again at 2.5 per cent. RBA Governor Glenn Stevens says overall global financial conditions remain very accommodative, as volatility in financial markets has recently abated, with long-term interest rates remaining low and ample funding available for creditworthy borrowers. Mr Stevens said Australia’s economy has been growing a bit below trend over the past year, with unemployment edging higher. That is expected to continue as it adjusts to a drop off in mining investment. Further ahead, private demand outside the mining sector is expected to increase at a faster pace, though there’s considerable uncertainty around this outlook.
The National Bureau of Statistics says that China's manufacturing growth in November maintained its strong pace from the previous month to stay at a 19-month high. The purchasing managers' index (PMI) was at 51.4, unchanged from October. The index was up from 51.1 in September and the highest since reaching 53.3 in April 2012. A reading above 50 signals expansion while a figure below indicates contraction. The figure was a further indication that the world's second-largest economy is gradually emerging from a growth slowdown at the start of the year.
Resources company headlines
Santos Limited (ASX:STO) is set to increase production in 2014 due to its liquefied natural gas start-up in Papua New Guinea. The company says it expects 2014 production to be between 52 and 57 million barrels of oil equivalent. The group flagged an increase from 2013 production, which it now expects to be approximately 51 million barrels of oil equivalent. Santos says its east coast gas market is in transition ahead of LNG demand and it sees fewer spot market opportunities in Western Australia. The group says it is committed to increasing returns to shareholders and it intends to review capital management options as production approaches.
Rio Tinto Limited (ASX:RIO) is struggling to find Queensland gas suppliers for a major alumina plant, according to media reports. The mining giant reportedly told media it was concerned as to whether there would be enough gas to fuel its recently expanded Yarwun alumina plant in Gladstone. Domestic buyers are competing with Asian investors, who have shown a willingness to pay around triple the price of traditional Australian gas prices. It is not known when Rio’s Yarwun contracts expire, but reports say it is likely to be in the next few years.
Rio Tinto Limited (ASX:RIO) says there are signs of a modest economic recovery, despite persistent market fragility and volatility. The global miner says it has delivered a $US1.8 billion improvement in operating cash costs in the ten months to October and remains on track to deliver the $US2 billion target for 2013. Rio Tinto also announced an $US800 million reduction in exploration and evaluation spend in the ten months to October. The miner forecast 2013 total capital expenditure of less than $14 billion, a reduction of more than 20 per cent compared to 2012.
Whitehaven Coal Limited (ASX:WHC) has been granted approval from its lenders to amend its $1.2 billion debt facility following delays in getting its key Maules Creek project up and running. The coal miner, has been working with lenders ANZ, Macquarie Group, CBA and NAB to amend its debt facility for several months, amid weak international coal markets damaging its share price. Following a string of delays in government approvals for the mine in New South Wales, first sales from the project are expected in the first quarter of 2015 at the very earliest. Whitehaven says the amended covenant accommodates the delays to the Maules Creek project, and is designed to provide flexibility to match the project timetable.
Fortescue Metals Group Limited (ASX:FMG) CFO Stephen Pearce says the miner’s modelling forecasts anticipate that the iron ore price will sit between $US110 and $US130 over the next two years. However, not all analysts agree. Credit Suisse is forecasting that iron ore prices will fall to $US115 by the end of the year and slide to $US90 by the end of next year.
Fortescue Metals Group Limited (ASX:FMG) says it's in a position to comfortably repay debt without having to get into joint ventures or sell assets as the price of iron ore remains strong. Chief executive Nev Power told media Fortescue's decision to use debt to fund its expansion had been justified after the Kings mine went in to production two weeks ago.
Oil and gas explorer
Icon Energy Limited (ASX:ICN) shares soared after it completed an $18.8 million capital raising, comprising the sale of 80.3 million shares to Hong Kong based HK Prosperous Technology. The emerging energies focused company is now Icon’s largest shareholder. Funds raised will be allocated towards Icon’s Cooper Basin exploration and development program.
