lthough, the 33% price reduction for iron ore fines form Australia agreed by Rio Tinto and Nippon Steel falls short of the general expectation, and at this moment, the likely Chinese reaction remains in a cloud of t uncertainty, this settlement could well be music to the Indian iron ore exporters, if the flowing scenario turns out to be true.
The FOB East Coast prices of Indian iron of 63.5%/62.5% have been stagnating at USD 52 per tonne to USD 53 per tonne level. CFR main Chinese port prices are reported to be at USD 68 per tonne (USD 67 per tonne to USD 69per tonne) with the freight from East Coast to China is reported to be around USD 15 per tonne.
As, US cents 97 per dry metric tonne unit FOB basis has been settled for Pilbara Blend Fines and Yandicoogina Fines on long term basis, the FOB price for 63.5% works out to USD 61.56 per tonne. The freight rates on spot basis from Australia to China are reported to have increased to almost USD 14 per tonne off late as compared to USD 11 per tonne recently, resulting in CNF levels of about USD 75 per tonne.
On the other hand Chinese mills are in frenzy and rushing to make iron ore purchases off late, which resulted in record import of more than 57 million tonnes in April. It is understood that the surge in iron ore import has continued in the month of May as well and the stock piles of iron ore at Chinese port have gone up by almost 10% MoM. It is heard that more than 80 vessels are waiting at main Chinese ports with a berthing period of almost 10 days, although it is not known that how many of them are carrying iron ore.
This phenomenon of scrambling for iron ore cargoes defies normal logic as the crude steel production in China is being curbed amidst limited domestic demand and almost negligible exports. The only possible explanation could be that Chinese buyers have been expecting the spot prices to go up after settlement of benchmark prices.
If we assume the long term prices of 63.5% grade iron ore to be USD 75 per tonne on CNF basis, after reducing spot freight from East Coast of India to China ie USD 15 per tonne, the derived FOB level works out in the vicinity of USD 60 per tonne, as against prevailing level of USD 52 per tonne. Thus, there is a room for increase in spot prices of Indian iron ore, if the Chinese iron ore demand remains unabated. The market reaction would unfold after China opens after Dragon Boat Festival on May 31st2009.
However, the fluctuations in freight rate would change the scenario described above. In addition the strategy of Vale would have a great effect on the whole scenario. Another pivotal factor would be the stance taken by Chinese mills as at this time when the negotiations for long term prices are in the final stage, they certainly would not like the spot prices to go up and may reduce buying putting downward pressure on spot prices for Indian iron ore fines. In fact some industry insiders point to the possibility of spot prices going to USD 45 per tonne level in coming times.
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Source : steelprices-india.com