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Global economic crisis tarnishes short term Iron ore outlook
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Friday, 23 Sep 2011

The global economic crisis seems to be achieving remarkable feet. Raw material prices viz., iron ore, coke and scrap had been in a sacrosanct league till recently. The invincibility of the elite commodities had been repeatedly proved with an indomitable recalcitrance throughout 2011.

Ever since the transition from annual contract to quarterly pricing the 3 biggies viz., Vale , BHP Bilton and Rio Tinto have never looked back cajoling Steel mills in submission. Supply demand dichotomy has been largely responsible for the lopsided tenor.

Chinese steel industry with surfeit in steel production even during the worst of times has given the leverage to the biggies on a platter. At the same time streak of supply inhibiting developments in India has led to a YTD drop of nearly 25% in exports in 2011.

Price graph has shown undulations in 2011 but at a higher trajectory and within limited range. Spot iron ore prices for Fe63/63.5% is prevailing at USD 187-188 per tonne after correction of USD 4 per tonne within a week. Even though it is a climb down from the peak of USD 198 per tonne in February it remains prohibitive.

Off late the rot has caught up in this market as well as the Chinese mills have bulked on production under the overbearing burden of global economic crisis. The crude steel production has dropped by 14% from July to August as the mills come to terms with irredeemable demand. Although there was 8.3% growth in imports in August over July the steam has been let off and mills have relapsed on buying.

Bolstered by the long term projections of demand supply gap Australian miners have planned to spend USD 85 billion in expansion over the next 5 to 6 years. In the short term by 2013 about 600 million tonnes is slated to be added to the global capacity.

Silhouetted against a gallery of economic catastrophes the confidence seems to harbour on oversupply as the OECD economies grapple with debt crisis. Steel production cut is inevitable in these nations with fallout on China. Iron ore average price forecast for 2012 has dipped to USD 151 per tonne and is expected to maintain a depressed phase with several projects in Western Australia coming upstream concurrently.

The change in dynamics recently has come as surprise to the 3 majors who have been pinning their expansionary ambitions on flowery projections. It will not only dent their confidence but the profitability as well.

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