Bulk Materials :Iron Ore——Trying to fight the tide in 2014

The iron ore market has been far more robust for longer than we, andwe suspect many others in the market, had expected. We think thatthe extent of destocking along all points in the Chinese steel supplychain was under-estimated, thus leading to a far more robust Chinesesteel production than was initially forecast.

    China’s property sales yoy growth has been a leading indicator forcrude steel production yoy growth. The current property cycle seemsto be peaking and is likely to result in lower steel output yoy growthlevels over the coming months.

    We believe that ample stock levels at steel mills coupled with softerdemand from steel production could reduce restocking momentum.

    Our China iron ore inventory model suggests China has moved into arestocking cycle since June. With the current level above the peaks of2009/10, the pace of restocking is likely to slow and weigh on iron oreprices in our view.

    In addition, iron ore price weakness could be triggered by a wave ofnew supply capacity coming to the market as the projectscommenced over the last 5 years are delivered. The Australianproducers are likely to dominate over the next 18 months, with the bigincreases expected in Q3 /4 13 and Q2 14.

    Given our forecast of market surpluses from 2014 onwards, marginalcost could play an increasingly important role in assessing pricepressure points. While the 90th percentile for the iron ore market sits atUSD98/t, the actual resistance level could be around USD106-110/tafter taking into account of sustaining capex, general inflation and orequality differentials.