Some interesting research from heavyweight City broker Deutsche Bank provides succour for investors fretting over the seemingly inexorable fall in iron ore spot prices.
Penned by Rob Clifford and his team, the one-pager looks at the implications for some of the larger companies of the current depressed price, while assessing the mechanics and movement in the drop in price to US$89 a tonne.
And it provides a guardedly optimistic assessment of the prospects for the market longer-term, beyond the current slump.
Short-term, the poor conditions on the spot market may put Eurasian Natural Resources (LON:ENRC), Ferrexpo (LON:FXPO) and Nyrstar (EBR:NYR) “at risk of refinancing and/or capital change plans”, Deutsche said.
The broker believes the market is currently undergoing a classic de-stocking phase, led by China.
It points out that the current prices suggest that Chinese output will fall to 640 million tonnes of iron per year, but adds: “We do not believe that this lower rate can be sustained and that it will recover once the current destocking has run its course.”
Part of the problem has been the slow reaction of miners to the fall, which would normally have prompted the lower cost producers to curtail their output rather rapidly.
“When a commodity in deficit moves into surplus, its price will fall through the cost of production until enough capacity is closed,” the broker explains.
“We believe that iron ore was already in surplus and was trading at the cost of production in China – what has happened had been a steel production drop and destocking event – the resulting lower demand has caused the price to slide down the cost curve rather than falling to it.”
This analysis chimes with that of Fairfax, the specialist natural resources boutique.
It points out that demand remains good “for the major miners who produce better quality and consistent quality iron ore”.
“We suspect Vale may see more cancelled shipments due to longer lead times and the cost of financing shipments as buyers drawdown on stocks,” Fairfax’s John Meyer adds.
“Vale recently sold a portion of its shipping fleet in what may have been a move to shift these assets off its balance sheet as bulk carrier prices fall.
“Smaller iron ore and coal producers in Indonesia and India are thought to be suffering from effectively cancelled orders by Chinese consumers.”