Most strategists reckon prices will stay high

Staff -- Purchasing, 10/6/2005

Iron-ore prices may slip a little next year, but stay near this year's record high, as growing demand for the raw material from steelmakers worldwide will keep supply tight, says a recent Bloomberg news report.

World crude-steel production for the 61 countries reporting to the International Iron and Steel Institute was 636.2 million metric tons through July, which was 6% higher than for the same period of 2004. China's output is 28% higher. So, a report by Canaccord Capital, Canada's largest independent brokerage, suggests that continuing expansions in world steel production led by China will increase demand for iron- ore shipments by 8.5% to 753 million metric tons in 2006.

According to Bloomberg, iron ore contract prices, traditionally negotiated to start in the fiscal year starting April 1, this year surged 71.5% to the equivalent of $40 a metric ton. Canaccord Capital analysts Damien Hackett, Gary Lampard and David Dattels suggest prices will drop 10% in fiscal 2006. They are less bullish on iron ore than Amro and Merrill Lynch & Co., both of which forecast prices will rise by 5-10% in the next fiscal year. UBS analysts think prices may stay near the current record-high level.

The Bloomberg story says global iron-ore exports will increase 9% this year to 691 million tons, lagging behind demand by 3 million tons. The deficit will grow next year to 8 million tons. "The global market for iron will remain tight," the Canaccord analysts suggest, since most of the $8.5 billion in new iron ore capacity being developed by CVRD (Companhia Vale do Rio Doce), BHP Billiton and the Rio Tinto Group, isn't due to start up until 2006 to 2009. Typically these three firms meet three quarters of world iron- ore demand. "By the end of this decade, we see a potential market gap of some 30 million tons a year for a major new supplier in the iron-ore market," the Canaccord analysts write.