In the past year, the iron ore industry has seen a very high level of uncertainty and volatility with prices fluctuating from a low US$99 a tonne in September 2012 to US$155 in February. We spoke to Colin Hamilton, Head of Global Commodities Research at Macquarie about the current outlook for iron ore and main factors influencing the market.
IMM Events: In a recent Bloomberg interview, you mentioned that the iron ore market may hold some surprises in the near future. Can you elaborate on that?
Colin Hamilton: My view was that the pullback in iron ore prices would happen sooner than people expect. In Q2, however this would set the scene for a price during H2 2013 which would be above the $100/t the general market was expecting. So far, this has proven to be the case. Certainly there is growth in sequential iron ore supply during H2 2013, led by Rio Tinto and Fortescue Metals Group, but the need to normalise inventory levels in China can absorb much of this.
IMM Events: In 2010 the benchmarking system for iron ore prices has been abandoned and replaced by short term contracts. Since then the price is widely regarded as an indicator for the health of the Chinese economy as a whole. Given that iron ore prices have slumped of late, would you see this as an indicator for a general slowing of the Chinese economy?
Colin Hamilton: The iron ore price slump of late was driven by Chinese stocking cycles – this is the main driver of any short term moves in iron ore. Actually, steel intensity in the Chinese economy has been increasing this year as real estate investment has picked up from a sanguine 2012. The slump in iron ore prices does however reflect falling steel prices due to steel oversupply – production has been running too strong – plus expectations that future production will be lower. We expect ~740mtpa of Chinese steel output in H2 compared to the 800mtpa seen through April.
IMM Events: What are the main factors influencing the European iron ore market?
Colin Hamilton: In order: The Chinese steel market. The European steel market. Brazilian iron ore supply. Continued macroeconomic concern and stuttering industrial production are certainly issues, however the global nature of iron ore means whatever is happening in China has a much bigger delta on European iron ore than anything else.
IMM Events: You will be presenting at the 8th annual EU Iron Ore conference on “Iron ore – a period of efficient volatility”. What insights can attendees expect to gain from your talk?
Colin Hamilton: I would hope attendees would gain an enhanced understanding of how the various big picture issues for iron ore will combine to influence future market dynamics. Iron ore is in some ways an unusual commodity market, however in my opinion it is also one of the most efficient, and I will be explaining the reasons for this, and why the steep gradient of the cost curve makes relatively high volatility a natural occurrence.