BMO Capital Markets Global Mining Research projects very poor iron ore demand this year.
Nevertheless, BMO Capital Markets Global Commodity Strategist Bart Melek forecast Tuesday, "With project delays and production cuts, BMO Research projects a return to reasonably balanced conditions in fairly short order."
In his analysis, Melek asserts, "The post recession long-term steel, iron ore and met coal story remains quite positive-U.S. and Indian fixed asset investment trends a key driver."
‘With the developing world set to keep demand growing and with a recovery in the western world," he added, "BMO Research expects the global annual iron ore consumption growth in 2010 through 2012 to trend around 3-4%."
BMO's global mining research found global steel output was down 23% year-on-year in April and "there is very little evidence that a material turnaround is coming anytime soon."
Meanwhile, Melek termed this year's iron ore contract negotiations "very interesting indeed."
"A big part of the reason why major seaborne producers do not want to settle yet is the concern that Chinese mills may not honour their contracts if the spot price drops materially lower," he said. "The price of Chinese spot fines is some 30% lower than the contract. However, very robust production cuts are lending some support for now."
"Another reason to wait may be associated with the Goan monsoon," he suggested. "Goa supplies, which accounted for some 45 million tonnes in 2008/09, will dry up in three weeks due to the rains."
"There is increasing speculation that spot markets will rule the day and a Chinese benchmark price for iron ore may not be set this year at all," Melek advised, "especially since major commodity financial institutions are gearing up to start iron ore trading. ...Japan and Europe may, however, choose to settle a benchmark price and leave the spot market to the Chinese."
While Melek believes iron ore prices will decline sharply, "they are still very, very healthy considering the massive decline in demand, considerable spare capacity and the cost structure. Iron ore at US$63/tonne is a victory for producers as they have negotiated a price well above the cost of production. This speaks to market power and alludes to better steel production activity in China, which is already near its 2008 highs in April."
Source: Mineweb
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