BHP & Rio Tinto may have reasons to warn of lower iron ore prices… But, I don’t think that their worries are relevant to CLF. I base this belief on my interpretation of Goncalves remarks at the last CC. He suggested that two iron ore markets are developing. One for low grade iron ore, the mainstay of BHP, Rio Tinto, and the Chinese mines. The other for high grade iron ore (62-66%), soon to be dominated by Vale’s S11D mine. The prices for these two markets are going in opposite directions (due to their pollution qualities). High grade iron ore (such as the 62% usually quoted on this message board) is steadily increasing in price and the low grade ore is decreasing.
Cliff’s contracts reference the higher grade prices (i.e. 62%). So, the worries that the low grade ore will crash is of little consequence to us. I may be wrong of course.
======== Goncalves statements in the Q4 CC:
18:20 … We have also encountered some new dynamics in the Chinese markets. Between the improved profitability of the Chinese steel mills, the elevated prices of coking coal, and most importantly, the increasingly serious crackdown on pollution as sponsored by the Chinese government, demand for higher grade iron ore has risen significantly. As a consequence, low grade 56% iron content ore is having a tougher time to find a home with good clients. This is evident as we observe the wider spread between the 62% FE reference price and the price of low iron content ore. Previously, when the Chinese mills were not being enforced to pay attention to pollution and coking coal prices were extremely low iron content didn’t matter. Now it does matter. And, that’s why we continue to see higher iron ore inventories at the ports. The stuff accumulating at portside is not the good ore. It is pollution heavy low iron content material. In sum, these port stocks could stay high or even go further up and that will continue to have a very limited influence on the 62% iron ore price index. And that’s the index that our agreements are based on to price the products we sell to our clients…
57:30 …China is moving toward a more responsible way of performing. The pollution combat in China is real now. And we are going to see more and more and more and more moves of China becoming a lot more like Japan, a lot more like South Korea, because don’t forget, Japan and South Korea in the mid to late 90’s transitioned from what China is now to what they are now… so the dynamics will be exactly the same, the difference is scale, the difference is size. So, I continue to believe that low iron content iron ore will continue to accumulate in the ports and it will get to a point that there starts to be a push back by the end users. Because S11D is a game-changer, 65, 66, 67% iron content is a game-changer. Because that makes the life of the steel mills a lot easier. Take a look, Lucas, in the gap between the current IODEX that might be $84/metric ton for the 62% iron and the premium that the 66, 67%, even the 65% iron content commands right now. It’s increasing. So that’s what needs to be seen in China. We are not going to be see China not buying iron ore not deploying fixed assets but it’s the opposite, they will continue to grow fixed asset investments, they will continue to buy iron ore, but they will be more selective. So, the times of the so-called low cost iron ore (nobody talks about the iron content, nobody talks about other properties, nobody talks about residuals) is gone. China is no longer in elementary school. China is at least a senior in high school. When China gets to college it will be impossible for these guys that produce the black stuff and call it iron ore, they call the black dirt iron ore, will continue to be suppliers of iron ore. It will be a different ballgame that’s moving China. But demand is phenomenal, is great, will continue to support production of good stuff, but the bad stuff for now will accumulate at the port. Very soon it will be accumulating in Australia. That’s the way I see it.
