Metals Commentary: CRU sees better year ahead for iron ore

Phil Newman, CEO of metals consultants CRU Strategies in London, kicked off the “Commodities and market outlook” technical session that launched the Prospectors & Developers Association of Canada convention with a relatively optimistic look at the broad commodity markets and iron ore in particular.

Newman described “capital aspects” as the industry’s biggest concern, repeating a quip he’d heard that the “Mines and Money” conference in London last fall could have been called the “Mines and Mines” conference, since there’s no money.

CRU notes that only three of the 22 mineral and related commodities it uses for quarterly benchmarking saw nominal price increases from 2011 to 2012: gold (6%), ammonia (5%) and met coke (2.4%). The worst five performers on CRU’s list for 2012 are: sulphur (-19.6%), alumina (-20.7%), iron ore (-22.3%), nickel (-23.2%) and coking coal (-37.1%).

In 2013, CRU predicts an improvement to a “lackluster” year, with an overall 0% change in its 22 benchmark commodities, with price rises seen in 13 commodities (from highest percentage gain to lowest): coking coal, tin, alumina, manganese, aluminum, iron ore, cobalt, palladium, nickel, zinc, platinum and copper.

CRU’s anticipated losers for 2013 are (from lowest percentage loss to highest): lead, gold, silver, phosphate DAP, urea, sulphur, potash, ammonia and met coke. CRU expects met coke prices to drop more than any other commodity in 2013 owing to the removal by the Chinese government of a 40% tax on met coke exports. (n.b. met coke and coking coal are separate products).

“The big problem is, will quantitative easing generate inflation? We don’t necessarily see that happening,” Newman said. “In general, the U.S. dollar is strengthening, which perhaps takes away a potential price driver. For the first time since 2008, the general risks are more balanced.”

As a result, he said, “investors have more choices now, and there are opportunities to invest in things other than commodities. For miners than means that more than ever, you need to have a quality project.”

He noted that 2012 was actually a worse year than 2008 for total money raised for mining in the English-speaking mining countries, expects that for the year ahead, there will be more small deals, though majors will have no trouble raising money.

Looking out to 2017, CRU’s top picks for price increases are palladium, tin and zinc, as supplies for all three are squeezed.

Turning to the iron ore market, Newman emphasized that Japan, China and India are “active all over the place as buyers and consumers [of mineral commodities], and iron ore is big part of what they’re doing.”

Newman said there have been “really high iron ore prices for six or seven years now,” and that if you look at who is controlling and dominating the market, it’s more or less the same companies as seven years ago, with the exception of Fortescue Metals Group (FMG-A) as potentially the fourth major in the iron ore industry.

 “A lot of people are banging on the door of iron ore; a lot of people want a piece of the action,” Newman said. “In fact, it’s a great market to be in, but the entry barriers are pretty significant.”

He described last year’s price volatility for iron ore as having a direct relationship with steelmakers’ profit margins. The destocking in mid-2012 caused prices to fall, and while Australian mines later recovered to take advantage of the price surge in the recent November-to-January period, Indian exports fell off a cliff.

Overall, Newman believes the current price for iron ore around of around US$150 per tonne is sustainable, and that “if your chief business has been iron ore, the last few months have been bloody good.”

He described Brazilian iron ore producers as having “really, really struggled” last year, with Vale (VALE-N) losing 6% of its market share, and new environmental laws, infrastructure issues and inflation all proving to be chronic challenges in the country.

On the other side of the world, Australia’s much-discussed new Minerals Resource Rent Tax only brought it $170 million or so in the last half of 2012 because of the price drop, but he believes it should bring in much more tax revenue for the government this year.

For his Canadian audience, Newman took time to compare the iron ore development projects in West Africa with those in the Labrador Trough. Some US$31 billion is broadly earmarked for West African iron ore development projects, which have better grade and are closer to Asian customers, while US$24 billion could be spent on new mines in the Labrador Trough, which has significantly better political stability.

He highlighted that Japanese, Chinese and Indian interests have opened up their wallets and now own or have under option 35% of the iron ore in the ground in the Labrador Trough, and are “just as sensitive to political risk as everybody else.”

Beyond 2013 for iron ore, Newman said “we do have prices weakening, we do expect growth to ease, and demand to fall a little bit. Europe and Japan will recover, but that’s only back to where they were in 2008.”

Looking ahead for the iron ore producers, he concluded that “costs will continue the major focus, and costs will come down. And China and Japan need resources; it will forever be thus.”