The iron ore market is looking better now than a year ago despite the recent crash in spot prices, according to respected Macquarie Bank commodities analyst Jim Lennon.
Speaking in Perth yesterday, London-based Mr Lennon said he was relatively upbeat about iron ore prospects. But he forecast a continued bad run for Australian nickel producers as improvements in Chinese nickel pig iron production techniques continued to push higher cost producers out of the market.
Mr Lennon said he believed Australian iron ore producers were well set to take advantage of falling exports from India, and from Brazilian iron ore producers' ongoing struggle to add new capacity amid falling grades at older mines.
He said, based on local feedback, iron ore exports from India could fall to below 20 million tonnes next year, from 120 million tonnes in 2011.
"Even though we've lowered our demand forecast for Chinese steel, at the same time with delays in investment projects around the world, with the sharp collapse in Indian iron ore exports and the likelihood that's going to stay low, the supply demand balance has actually improved a little bit in a three to four-year view," he said.
Mr Lennon said prices for beneficiated Chinese domestic ore, grading about 66 per cent iron, had recently topped $US140/tonne and he believed that Chinese steel production was set to resume growth after its period of destocking.
"The trend for iron ore pricing is set for a more sustainable recovery," he said. "That period when the price shot below $US100/t was driven by bank credit controls, so the steel mills and the traders switched to buying from the domestic market. That's why the domestic price held up (at $US112/t). Now that credit conditions have improved and iron prices have gone up you're starting to see imports pick up very, very strongly over the last month or so. So we'd certainly see iron ore well supported at these levels."
Mr Lennon's outlook came as Japan's biggest iron ore trader, Mitsui, yesterday said China's government stimulus and a projected increase in steel output would support a price of $US120/t.
"I think we saw the floor of it in the second quarter (ending September 30)," Mitsui chief executive Masami Iijima said in Tokyo.
"Europe's debt crisis is having an impact on Chinese exports. But, if the stimulus works we'll see an upward trend in steel product prices."
Iron ore shipped to China was worth $US120.10/t last night, having held relatively steady for the past two weeks after falling as low as $US86.70/t in September.
Brazilian producers are seen as Australia's main rivals but Mr Lennon said a recent visit to South America had convinced him that they were struggling to match the Pilbara's expansion plans.
The trend for iron ore pricing is set for a more sustainable recovery." Analyst Jim Lennon