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Weaker-than-expected construction activity and new curbs on home buying are raising concerns about iron ore’s recent run and are prompting some analysts to lower their price forecasts.
Benchmark iron ore (with 62-percent iron content) is now trading around $134.40 per metric ton (MT). That’s down from the 16-month high of $158.90 that it hit on February 20, but still well above September’s three-year low of $86.70.
The surge came as Chinese steel mills restocked in anticipation of the spring construction season. However, demand has been slow to take off: as of March 8, the inventory of steel products held by Chinese traders hit a record 22.3 million MT, according to Reuters. Long steel products, which are mainly used in construction, account for 14.1 million MT of that figure.
Investors are also concerned that recent government moves to curb real estate speculation could weigh on iron ore demand. On March 1, for example, China hiked taxes on capital gains from home sales, an AsiaOne article notes.
Iron ore prices could find some support from lower inventories, however. Chinese inventories fell to a three-year low of 66.3 million MT in the week ended March 8, though they rose slightly, to 67.2 million MT, in the week ended March 15, according to a March 20 Bloomberg article.
Iron ore’s recent decline broadly aligns with a number of newly released forecasts. On March 20, Goldman Sachs (NYSE:GS) forecast an average 2013 iron ore price of $139, down from its previous estimate of $144.
“The two key drivers of this more subdued outlook are the growing role of scrap in Chinese steel production and ongoing investment in Chinese domestic iron-ore production,” the bank’s analysts wrote in a note quoted by Bloomberg. Goldman’s forecast follows a recent prediction by Deutsche Bank (NYSE:DB) that iron ore will pull back to $115 per MT by December 2013.
Company news
Goldman’s forecast sent shares of Vale (NYSE:VALE), the world’s biggest iron ore producer, tumbling to a six-month low of 32.39 reais on Brazil’s Bovespa exchange on March 19. China accounts for about 34 percent of Vale’s revenue. Goldman also cut its target price on Vale’s American depositary receipts (ADRs), which trade on the New York exchange, to $26 from $29.30. Vale currently trades around $17.
Teck Resources (NYSE:TCK,TSX:TCK.B) is seen as a leading contender to buy Rio Tinto’s (NYSE:RIO,ASX:RIO,LSE:RIO) 58.7-percent stake in Iron Ore Company of Canada. As Iron Investing News reported on March 7, Rio is divesting assets to cut its debt. “Teck would be my number one candidate for taking a run at the IOC assets,” analyst John Goldsmith of Montrusco Bolton Investments told Bloomberg. He also noted that such a move would “be consistent with what they’ve said in the past in terms of getting into other bulk commodities.”
Rio also said it is moving ahead with its $10-billion Simandou project in Guinea, dismissing reports that it had suspended work at the site while it waits for the country’s government, which has the option to acquire a stake in the project, to finalize a key financing agreement. “The Simandou project is not frozen and Rio Tinto continues to progress the project and is committed to its development,” the miner said in a statement quoted in a March 12 Fox Business article. The mine is forecast to produce 93 million MT of iron ore a year, with start up slated for 2015.
Ukraine-focused iron miner Ferrexpo (LSE:FXPO) reported its 2012 financial results on March 13. For the year, earnings fell 62 percent, to US$36.57 a share from $96.97 in 2011. Revenue declined 20 percent, to $1.42 billion. The company sold 2 percent fewer iron ore pellets than in 2011, and the average iron ore price was 23 lower. Production came in at 9.3 million MT. The company aims to increase its output to 12 million MT in 2014 thanks to its new Yeristovo mine. Ferrexpo also said it will pay a special dividend of 6.6 cents a share in addition to its regular 3.3-cent payout.
Junior company news
Centaurus Metals (ASX:CTM) continues to make progress with its Jambreiro project in Brazil. The country’s Federal Department of Mineral Production has now approved the company’s economic development plan, Mining Weekly reported on March 18. That’s a key step to receiving an installation license, which will let Centaurus stick to its plan to start construction in the current quarter. Jambreiro will produce 2 million MT per year over a nine-year life, according to a March 18 press release. The company also has two other iron ore properties in Brazil.
Century Iron Mines (TSX:FER) has released the results of a NI 43-101 compliant resource estimate on its jointly owned Joyce Lake direct-shipping ore project, which is part of the Attikamagen project in Newfoundland and Labrador. Century has joint ventures at Attikamagen with Wuhan Iron & Steel Group (SSE:600005) and Champion Iron Mines (TSX:CHM). The estimate shows 10 million MT of measured and indicated resources with an average grade of 59.45-percent total iron, plus 5.6 million MT inferred, at a cut-off grade of 50-percent total iron.
Ferrum Americas Mining (TSXV:FEM) plans to start production at its Cerro Rojo iron ore project in Bolivia in 2015, Platts reported. The company’s manager in the country told Platts that Ferrum will initially produce 500,000 MT per year, mainly for export to China, but said that could rise to 1 to 2 million MT per year depending on demand.
Oceanic Iron Ore (TSXV:FEO,OTCQX:FEOVF) staked 86 claims covering 36.6 square kilometers near its Roberts Lake concession in Quebec in February. In March, it staked 21 claims (9.3 square kilometers) near its Hopes Advance concession. The company believes these new claims have the potential to expand mineral resources at both projects.
Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.
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