Softening Iron Ore Prices a Temporary Trend – Part One

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The Iron Ore (IO) forward price curve is a fair reflection of popular sentiment regarding the likely direction of iron ore prices in Asia.

Source: Credit Suisse

As MetalBulletin reported this week, IO prices are softening for the first time since October in the face of weak Chinese demand and falling steel prices in China. The fear is that rising oil prices will impact global growth, rising iron ore stocks at ports are reflective of falling steel production and concern that current weak demand is a result of too much tightening by the Chinese authorities.

Source: MetalMiner IndX

As our chart shows, Chinese finished steel prices certainly have eased of late particularly for construction-related products such as rebar and beams, whereas prices for cold rolled steels, used more in automotive and white goods have merely plateaued. To add to steel makers’ woes, according to a Reuters article, quarterly contract prices are set to rise substantially from the first quarter — Vale estimates by some 20 percent — continuing a trend that has been ongoing for all of 2010 as this graph from Credit Suisse research shows.

Source: Credit Suisse

The quarterly price is set on the average of the previous three months spot price and hence lags the market, so IO consumers could be excused for thinking the quarterly rise will be temporary; but Credit Suisse suggests otherwise. In a report to investors the bank systematically analyzes the critical price drivers and sees more upside than downside for just about all of them.

In part two we review those drivers and what they tell us about the likely direction of prices going forward.

–Stuart Burns

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