The Rising Influence of Rising Affluence

[Democritus_of_Abdera]

Re: Near-term Direction of Iron Ore Prices...

As I read the news, I'm torn between two very different expectations regarding near term (3-6 month) spot iron ore prices in China....

One, which I classify as a momentum-based expectation, predicts that iron ore prices are likely to rise in the near term (i.e. 3-6 months) because prices are strong now and seem to be strengthening daily.

The other, which I classify as a fundamental-based expectation, predicts that iron ore prices will fall in the near term largely because this is the expectation of entities that should have done a fundamental analysis.

Generally, I go with the fundamentals, but in this case I am siding with momentum. For one thing, I have lost faith in the ability of mining companies to assess Chinese markets.

This dichotomy is evident in two recent news articles: one referencing current spot prices vs predictions by the Reserve Bank of Australia (Shane Wright, The West Australian, Feb 20), the other reference current spot prices vs predictions by the miners BHP Billiton and Fortescue Metals Group (Manolo Serapio of Reuters: Feb 20)...

The momentum thesis is supported by the following statements:

From the Reuters article (http://www.reuters.com/article/2013/02/20/markets-ironore-idUSL4N0BK24720130220 ):

Iron ore rose to its priciest in nearly six weeks and looked set to mark a new high in more than 16 months as Chinese buyers rebuild stockpiles ahead of steel demand picking up steam....

Inventories of iron ore at small to medium-sized Chinese steel mills have dropped to about 10-15 days of consumption after the Lunar New Year break from 20-30 days previously, prompting them to restock, said a trader in Rizhao in China's eastern Shandong province... "I think we're seeing mild restocking because some mills are also hesitating to buy with prices continuing to rise," the trader said, adding he sees prices climbing above $160 but staying below $165 for the rest of February.

A Shanghai-based trader said he is considering buying cargoes, but is hoping for prices to retreat first. "Before the Chinese New Year, most medium-sized traders have all sold out cargoes so they are looking to buy, but some believe the prices are too high and risky," he said. If steel prices sustain recent gains, that may prod these traders to chase iron ore cargoes, he said.

Demand for steel in China usually picks up after the Lunar New Year as construction activity resumes following the winter freeze.

The fundamental thesis is supported by the following statements:

From the Reuters article:

BHP said on Wednesday it expects iron ore prices to remain under pressure as new low-cost supplies come into production, even though demand is expected to improve over the next 12 months.

Smaller producer Fortescue Metals Group sees iron ore prices settling around $120-$130 this year, with potential for it to be higher if Chinese demand remains strong.

From the West Australian article (http://au.news.yahoo.com/thewest/a/-/wa/16185923/rba-tips-iron-ore-price-dip/ )

It <the Reserve Bank of Australia> believes iron ore, which hit $US157.10 a tonne overnight, is likely to edge down soon.

"Iron ore prices had increased significantly over the past two months, largely reflecting stronger demand from China owing to increased industrial activity there as well as some rebuilding of iron ore stocks after earlier depleting inventories," the bank said.

"However, iron ore prices had run well ahead of Chinese steel prices in recent months and it was widely expected they would not be sustained at these high levels."