On the face of it, news of a possible halt to Indian iron ore exports is good news for the likes of BHP Billiton, Rio Tinto, Vale of Brazil and Fortescue Metals and a cast of hopefuls.
It means global iron ore prices are rising again as a dispute in a key Indian producing state threatens to cut supplies to China.
But it is a short term story at a time when most investors in this sector are ignoring a more important medium term trend, the looming oversupply of iron ore as new mines and expansions come on stream.
More of that in a moment.
Exporters in the Indian state of Kanatanka, the country’s second biggest iron ore exporting state, may declare force majeure by the end of this week if a government ban on what it calls illegal mining and export permits continues.
Already, the dispute spot iron ore prices have nearly rebounded to $US150 per tonne with freight for 63.5% iron content up $US10 than last Thursday and ending a recent sharp slide.
India mines around 257 million tonnes of ore and had exported 110 million tonnes in the year that ended last March, most of it to China.
But this is short term. In fact it may help fourth quarter prices rebound from an expected 20% or so fall in the current third quarter, if the dispute in India continues.
It probably won’t, the stakes are too high, so when there’s a settlement, prices will ease back under the influence of slowing demand and steel output in China.
The impact of the surge in iron ore prices is not to be denied.
We saw this week how a sharp rise in prices helped push Australia to a record trade surplus of $3.5 billion in June, with the prospect of a record surplus in the 2011 financial year in store, even after the expected slowdown.
Iron ore prices for Australian ore rose 40% in April alone, according to the Australian Bureau of Statistics.
But we should now start looking out three years and more and wondering what happens to prices when the current expansion plans of the likes of Vale, Rio and BHP, not to mention all the other countries and companies which want to get rich in digging dirt and shipping it to China.
For an idea, we should look at an influential United Nations study which sees a surge in global iron ore supplies from around 2012, and a drop in prices.
It is something you didn’t read in yesterday’s interim profit statement from Rio Tinto which rode to riches on the back of its mostly Australian iron ore division.
The study comes from the United Nations Committee on Trade and Development (UNCTAD) and forecasts an oversupply situation that will cut returns to existing and emerging suppliers.
But, importantly, the study doesn’t forecast a collapse in prices, merely a fall back to levels around 2008, which were substantial in any case.
The report says new iron ore mining capacity taken into operation in 2009 was almost 75 million tonnes.
But a further 685 million tonnes (mt) of new production capacity may come on stream between 2010 and 2012.
That’s more than Australia and India (the second and third producers) are currently producing.
Steel producers (such as Arcelor Mittal, the world’s largest, and a host of Chinese mills) are increasingly investing in "captive" mines -that is, mines they own themselves – both for iron ore and coal, the study says.
That’s why Chinese steel mills are buying and investing in small and medium-sized mines in Western Australia, especially in the magnetite rich Midwest area of the state,
UNCTAD predicts that the world iron-ore market will be characterized by tight conditions over the short term, but that supply will gradually catch up with demand, and prices will decline from current levels, although they will stay higher than in the period before 2008.
The report cautioned that supply would continue to lag behind demand in the short term, while pricing had become more obscure following the breakdown of an annual benchmark negotiation process on iron ore markets earlier this year.
"We think that this year and next year the world iron ore market will be characterised by tight conditions," said UNCTAD official Alexei Mojarov in a statement.
He forecast that new iron ore mining capacity coming on stream would slowly bridge the gap between supply and expanding demand in coming years.
"We believe that in the future the supply will gradually catch up and prices will gradually decline from present extreme levels but will stay at a higher level than 2008," he told journalists.
That would see prices of $US60-$US100 a tonne in China, including freight, well down on the current level, but substantially higher than what the world price was in 2006-7.
At the moment, UNCTAD says the three largest iron-ore companies, Vale, Rio Tinto, and BHP Billiton, controlled 35% of total iron ore production and 61% of the total seaborne trade in iron ore in 2009.
Brazil’s Vale is still the world’s largest producer, but its position has eroded from 17.3% of the market in 2008 to 16.0% in 2009.
Chinese domestic iron ore output is falling and will continue dropping as a result of widespread mine closures.
In good news for the producer exporters like BHP, UNCTAD says China likely will pay more for the ore it imports, as the new pricing system gives the major iron-ore producers more leverag
