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COLUMN-India the X-factor for Asia iron ore market: Clyde Russell

Source : REUTERS
Last Updated: Tue, Oct 30, 2012 14:50 hrs

-- Clyde Russell is a Reuters market analyst. The views expressed are his own. --

By Clyde Russell

LONDON, Oct 30 (Reuters) - India is emerging as the unknown factor for Asia's iron ore market in 2013, which otherwise looks to be in a fair balance between supply and demand.

The key results from a Reuters poll of analysts on Monday showed median forecasts for iron ore prices next year at $120 a tonne and for Chinese import demand to gain 6 percent to 774 million tonnes from an estimated 730 million this year.

The scenario that the poll presents is for solid growth in iron demand from the world's biggest user and steady prices as well, given Asian spot prices closed Monday at precisely $120 a tonne, near the highest level since late July.

It's also likely that China will account for the bulk of growth in seaborne iron ore demand, with recession-plagued Europe expected to be steady at best and modest growth likely from the rest of the world.

An increase of 44 million tonnes from China should also be well within the capacity of the main global miners to supply, given what is known of their expansion plans and targets.

The world's largest iron ore miner, Brazil's Vale , is expected to produce about 320 million tonnes in 2013, only marginally up from current output levels, which amounted to 317.4 million tonnes in the 12 months to September.

The company expects its expansion projects to start coming on line around the end of next year, but for the most part increases in seaborne iron ore supply will have to come from Australia in 2013.

The bulk of Australia's increased output will come from world number two producer Rio Tinto, which is expecting to raise production by 33 million tonnes to 283 million.

Third-ranked BHP Billiton said it expects a 5 percent increase in output in the year to end-June 2013 over the same period a year earlier, which if extended over the calendar year could mean about an extra 8 million tonnes.

Fortescue Metals Group has recently scaled back its rapid expansion plans in the face of slower demand growth from China and market unease over its debt-funded model, but even so it may produce an additional 20 million tonnes in 2013.

Taking the three Australians miners together, output may rise in the region of 61 million tonnes, more than enough to meet the forecast growth in China of 44 million.

In fact, it's enough to suggest that the iron ore market will be in a small surfeit, which in turn suggests limited upside to prices.

Of course, forecasts tend to assume that other things remain equal, and for iron ore in 2013 this may not be the case, especially where India is concerned.

The South Asian nation used to be the world's third-largest exporter of the steel-making ingredient, but the industry has been roiled in recent years as the authorities try to crack down on illegal mining and exports and reserve more production for the domestic steel industry.

India's exports fell more than 40 percent in the April-to-June quarter to 12.1 million tonnes from a year earlier, according to official data.

Since then, however, a series of court rulings have called into question whether any ore will be shipped out in the next few months and into 2013.

The Supreme Court suspended iron ore transport on Oct. 5 in western Goa state, a region that usually produces about 50 million tonnes a year and exports almost all of it.

This followed a limited resumption of mining in neighbouring Karnataka state, but it's reasonable to assume that much of this output will be used domestically.

The risk is that Indian ore exports, which head mainly to China, will continue to slump as the authorities continue efforts to regulate and organise the industry.

While a total loss of exports in 2013 is unlikely, the risk has to be that they will be substantially lower than the 57.35 million tonnes shipped out in the year to end March 2012.

A loss of about half, or about 30 million tonnes, would probably be enough to turn the Asian iron ore market into a small deficit, which the major miners might struggle to immediately meet.

Throw into the mix the possibility of weather events being more disruptive than normal in North Western Australia, and the risks seem skewed toward supply not quite meeting expectations.

Of course, it's also possible that Chinese demand will be below the consensus, and monthly import figures will need to be closely watched.

However, the poll seems more to represent a best-case scenario that assumes supplies won't be subject to shocks, which may be optimistic given the uncertainty surrounding India.




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