Don’t bet against China: Andrew Forrest bullish about iron ore demand

As the value of iron ore fell further to prices not seen since 2012, a group of mining bosses, including Andrew Forrest, told a conference the price slump will be short-lived and continued to talk up the strength of China’s commodity appetite.

Iron ore dropped 4.1 per cent on Friday to $US91.80 a tonne, its lowest price since September 2012.

This represents close to a 30 per cent fall since the beginning of 2014 and has chipped away at the value of Australia’s biggest miners as investors seek a way out of the price rout.

Fortescue Metals Group lost 13 per cent in May and is down 23 per cent year-to-date.  Atlas Iron fared worse, sinking 40 per cent and Mount Gibson Iron Limited around 24 per cent.

While Australian’s major miners like Rio Tinto and BHP are so far shielded from any real price crunch, with cash costs of between $40-$45 per tonne produced, further dips have the potential to derail juniors who have higher outlays.

Some analysts are pointing to lows of $US87 a tonne by the second half of the year, driven by an oversupply and a lessening in steel demand in China.

The country is turning off its old and emission-heavy blast furnaces, displacing millions of tonnes of iron ore.

Meanwhile, there is more of the steel making ingredient in the market than it can handle and Citigroup predicts that the global seaborne iron ore surplus will rise to 67 million tonnes in 2014 compared to just 2 million tonnes last year.

Macquarie also released a bearish note on Friday. 

“We believe the next step of iron ore’s transition process will be a clearing out of excess inventory — a process that will mean purchasing activity needs to drop below real demand and is likely to result in near-term downside risk to prices,” Macquarie analysts warned.

Citigroup said that following a decade in China where steel production growth outpaced GDP growth, urbanisation in the country is set to slow, putting further pressure on prices.

However the miners themselves, while cautious, have proved to be mostly bullish about iron ore's long-term value.

Fortescue Metals Group chief Andrew Forrest played down concerns of further price drops, stating China would continue to grow.

Speaking at the Australia in China's Century conference, Forrest said China was trying to urbanise “an Australia every year”.

His quote: “a bet against China is the only guarantee of loss I’ve seen for a long time”, may have worked as FMG stocks rose by 8c in yesterday’s trade.

“The Chinese ability to manage poverty out of its country is unprecedented and their consumption of steel is still running at record rates,” Forrest said.

“They are hardworking, intelligent and determined to raise their children's living standards more than most countries … 400 million people still have to be urbanised.”

As for the price, Forrest said he was comfortable with the value of iron ore hovering around the $US110 a tonne range.

“It could wander down to $US80, it could wander up to $US140,” he said.

Mike Komesaroff, head of the China-focused Urandaline Investments, predicts the price will creep up to $US110 a tonne over the next 12 months.

He said the steel intensive construction sector and the poor quality of Chinese iron ore would ensure demand from high-quality producers would keep prices healthy over the long term.

MMG boss Andrew Michelmore told the conference the closure of old and inefficient blast furnaces, and the natural cut back in steel production as a result, had been used by traders to drive the price down, The Australian reported.

Michelmore is also expecting higher iron ore prices in the long term.

“They are still 600 million people who live on $US600 a year and the government has to get them to $2000. Inflation kills those people, and the government is acutely aware of it," he said. 

“So I think you will see this turmoil over another year and a half to two years. But it is actually setting a far better base for continued seven per cent growth, in second gear, for a much longer time.”

Image: The Australian

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