SUNDAY TIMES - Lack of steel seen in surging iron-ore price
Sunday Times Business By LUTHO MTONGANA, 2017-03-19 00:00:00.0

Lack of steel seen in surging iron-ore price

This week's gains in the iron-ore price followed data from the China Iron and Steel Association that showed an increase in demand for steel.

The iron-ore price has surged since January 2016, but metals analysts are divided on the outlook for the rest of this year.

However, even if prices drop from the current $92 a ton (about R1150) to $60 a ton or even $50, many producers seem to be in a good position - with less debt and reduced production costs - to weather weaker prices.

This week's gains in the iron-ore price followed data from the China Iron and Steel Association that showed an increase in demand for steel.

In addition, data from the Statistics Bureau of China showed an 8.9% rise in fixed-asset investment for the first two months of this year, compared with 8.1% for 2016 as a whole.

And the Dalian Commodity Exchange cut transaction fees by 90% for near-month iron-ore contracts between May and July to boost transactions.

Bulk and base commodities such as copper and nickel also showed a slight increase.

The iron-ore price has averaged about $85 a ton this year so far, compared with less than $45 during the first two months of last year.

But Macquarie Group this week revised its outlook for bulk and base commodities, saying that even though the first quarter had been positive for iron-ore prices a drop to $50 a ton in the second half of the year was expected.

It also lowered its expectations for coal and manganese prices.

Since the start of the year, iron-ore prices have gained 17.7%, coal has dropped 9% and manganese by 14.6%.

Setendra Naidoo, an analyst at Capricorn Fund Managers, said the reason for pessimism about the iron-ore price was a lack of confidence that demand in China would continue at current levels.

He said the boom had been sparked because China was now spending the $750-billion (about R9.5-trillion) stimulus package it announced at the beginning of last year.

Analysts said there would be increased pressure on the iron-ore price as Vale's new mine in Brazil, S11D, would be the biggest low-cost producer in the world, producing iron at about $11 a ton.

Australian miners such as BHP Billiton and Rio Tinto produce at about $20-$28 a ton.

"In the long run, I don't see [the price] holding, but certainly in the next six months it can hold up," he said.

Some analysts say the prices of bulk and base commodities are being somewhat supported by expectations that China's ruling Communist Party, at its 19th national congress in November, will adopt measures to maintain economic growth.

In South Africa, high-cost producer Kumba Iron Ore was not expected to pay a dividend, given the uncertainty in iron-ore prices, Naidoo said. Kumba produces at $40-$45 a ton.

"As it stands, iron-ore prices remain attractive with over 98% of the cost-curve making profits, including Kumba."

Makwe Masilela, a portfolio manager at BP Bernstein, was optimistic on bulk and base commodity prices for the year.

He agreed that when the iron-ore price did drop, Kumba could slip into the red, but given the current outlook for iron ore the company would still survive.

Masilela said that if US President Donald Trump's proposed infrastructure spend of $1-trillion gained approval, it should fuel a surge in prices of iron ore and industrial metals.

"If Trump gets that approved, the only way for steel and iron-ore prices is up," Masilela said.

This week's mining production and sales data from Stats SA indicated that bulk commodities have been holding up the positive mining production numbers over the past month.

Production in South Africa increased by 1.3% year on year in January, with iron ore contributing 7.3% and manganese increasing 20%.

Total mining sales in December increased 23% year on year, helped by a 64.7% increase in iron-ore sales.

Coal sales rose 13.9% and manganese sales rose 317.7%, Stats SA said.

Reuters this week quoted a Beijing-based trader as saying physical demand in China for high-grade iron ore from Australia and Brazil was firm, but not for lower-grade material.