Iron ore prices to rise, BHP says, even as China curbs liquidity

BHP Billiton (BHP-N) chief Marius Kloppers told Australian Broadcasting Corp.’s Inside Business program in an interview on Feb. 12 that rebounding demand from China is likely to push up benchmark iron ore prices in the coming months.

Kloppers explained that forward prices were about 100% higher than benchmark prices and that China demand had gone up faster than anticipated.

His comments come at a time of increasing worries about global growth in the wake of Beijing’s latest measures to curb lending by lifting banks’ reserve requirements.

Stock markets have taken a hit recently partly due to anxiety that China’s efforts to slow bank lending may impede global economic growth. China is the world’s largest metals consumer.

On Sunday, news agencies quoted Goldman Sachs’ chief economist Jim O’Neill as saying that China, in a bid to slow its economy, may strengthen its currency by as much as 5% in a one-time revaluation.

“They need to do something to slow the economy down and deal with the inflation consequences,” O’Neill was quoted as saying.

Last year China implemented a 4 trillion renminbi (US$585 billion) stimulus program. And even then, the government’s budget deficit for 2009 was just 2.2% of GDP, Reuters reports.

O’Neill estimates that China’s economy is growing between 12% and 14%.

The World Bank forecasts China’s economy will grow 9% this year, faster than global growth of 2.7%. China’s economy expanded 8.7% in 2009.

Bank of America Merrill Lynch noted in a report earlier this month that China’s demand for metals will “slow but not collapse ” as the government starts to tighten its monetary policy.

The report pointed out that in addition to hiking the required reserve ratio, a recent draft of the Government Work Report “omitted the key words ‘proactive fiscal policy and relatively loose monetary policy,’ which had been in use since 4Q08.”

“The measures implemented by the government will almost certainly have an impact on the economy and metals demand,” the report stated. “However, for now we think that government is effective in implementing its economy policy. The removal of monetary stimulus is in our view desirable, necessary and a step in the right direction.”

The report noted that the loan quota “will merely slow loan growth from 30.7% year-on-year in 2009 to a still high 21.5% this year.”

The Bank of America Merrill Lynch economists argued that fixed asset investment will likely slow, but the sector will still expand by 26% year-on-year in 2010, down from 30.5% in 2009.

They also asserted that while China’s construction sector makes up about 50% of the country’s demand for metals, and there may be some weakness in the real-estate sector going forward, “commercial construction activity looks to be supported and urbanisation continues.”

Finally they predicted that China’s exports are likely to “bounce back” — a very critical component of recovery given that exports “were a crucial part of China’s metals demand growth prior to the economic crisis.”

In terms of iron ore pricing, BHP’s Kloppers believes China’s steel production will rise for at least another 20 years, and double from current levels, by 2025.

“For iron ore, coking coal, the prices that we get today were settled at the depth of the economic crisis so I think there’s probably a good chance that they will go up from where they are today,” Reuters quoted Kloppers as saying.

Iron ore prices are set each year, usually at the start of the Japanese financial year in April, in negotiations between buyers and the major iron ore producers BHP Billiton, Rio Tinto (RTP-N, RIO-L, RIO-A) and Vale (VALE-N).