Via FT Alphaville comes this quote from Charlie Aitken:
Right here right now the spot markets are in turmoil as Vale dumps cargoes, traders who have been caught long at higher prices cut that trading inventory, and Chinese steel mills sit on their hands and run down inventories. It is estimated that Chinese steel mill inventories are down to 10-15 days, down from an average inventory position of 30-35days. The trading houses are waiting for the knife to stick and the whole situation has turned into a buyers strike.
FMG also disagrees there has been any structural shift in the Chinese iron ore cost curve. The vast bulk of Chinese iron ore remains low fe magnetite, while labour and energy costs continue to rise in mainland China, remembering magnetite is energy intense. Yet, buyer’s strikes end and to me this spot iron ore market is like watching any market where “stop losses” have been triggered. The final forced capitulation selling is always the most spectacular, gets the most attention, yet does actually generate a price bottom.
The trading rubber band in spot iron ore is extremely stretched. To use todays spot prices as permanent will prove incorrect in my opinion, with 60% of the world’s iron ore production loss making at current prices. Yet, as you can see, iron ore equities move almost perfectly in tandem with the daily spot price which suggests spot prices are priced in to iron ore equities.
My personal view is there is going to be a upside bounce back to $120-$130t in spot iron ore over the next six months as both China, Eurozone and US fire further stimulus bullets, Chinese steel mills restock, traders move back into the spot iron ore market and high cost supply shuts down. The potential for a spot price rebound is very high in my view, but of course that’s hard to see at the crescendo of a major correction in the spot price.
This is all fine and good but it doesn’t address the core problem. There is no doubt that the iron price is being hit by a cyclical correction but the slump is much deeper and more persistent than any that has come before thus signalling something else is going on. The price is down by one third in the past couple of months. But it is down over half in the past year.
The real issue is the combination of rising supply and diminishing demand growth. These two forces are what is killing the price floor assumptions. There is no doubt there’ll be snap back in the ore price in the short term but if Chinese demand growth is going to be lower then so too is the price floor in the medium term. To be honest the entire notion of a “price floor” is a bedside story told to help over-geared miners sleep. It should just be called “the price” like it is in every other market.
