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\n\tOne of the immediate reasons China has stalled on Australian ore imports is a large influx of shipments from rival producer Brazil, however Commonwealth Bank researchers suggest the major influence is falling steel prices. Chinese iron ore imports were lower in April and port inventories were also lower, while domestic output increased, suggesting to CBA<\/span> a de-stocking of import inventories. The risk is this de-stocking continues into May and thus pushes iron ore prices lower still.<\/p>\n \n\tDeutsche Bank notes that spring in China is usually a period of stepped up steel production as fabricators and builders pre-order for the summer. Everything slows down again in the mills once summer arrives. The problem is that under the current climate of a Chinese economic slowdown, the spring production up-tick went missing this year. If a slow spring then morphs into a typically slow summer, iron ore prices must come under further near-term pressure.<\/p>\n \n\tDeutsche sees iron ore prices falling further, perhaps to under the US$120\/t mark. Underscoring Deutsche's soft view are recent moves in certain reliable economic numbers which Beijing does not get the “official” abacus out for – the one on a bit of a skew. Chinese electricity production and rail freight traffic numbers having been falling and commercial bank loan growth remains subdued.<\/p>\n \n\tDeutsche's view could change were Beijing to announce a more substantial monetary policy adjustment. The recent run of bank reserve requirement ratio reductions are expansionary but really only incremental.<\/p>\n \n\tSo the short term outlook for iron ore remains to the weak side, but the picture begins to change when one expands to a longer term view.<\/p>\n \n\tCiti's<\/span> global metal & mining analysts have undertaken a thorough review of the iron ore market which has prompted some changes in their longer-term outlook. Through its global stock coverage universe Citi<\/span> covers 80% of all global iron ore trade and 90% of additional supply. Most importantly, this has allowed the analysts to construct a “bottom up” cost curve for the industry.<\/p>\n \n\tIt is the mining industry's worst kept secret – production costs are rising faster now than feared even as global demand softens. Such a cost trajectory is forcing the world's big miners to reassess the timing of large expansion projects. In the context of iron ore, Citi<\/span> has found the cost of production for China's domestic lower grade ore is rising rapidly, such that the cost per tonne<\/span> at the top end of the production cost curve could rise to US$125\/t by 2015 from around US$105\/t now.<\/p>\n \n\tThe implication here is that high cost producers would be forced out of the market, and that lower Chinese domestic production would in turn imply greater import demand and hence support for the global iron ore price. However in the period to 2015 we also must acknowledge the expansion plans of major seaborne producers both in Australia and Brazil. Increasing seaborne supply may offset reduced domestic capacity in China, but then costs for these expansion projects are also rising rapidly.<\/p>\n \n\tCiti<\/span> does not see China's high cost producers shutting down in a hurry. Even with steel prices held flat, Citi<\/span> would not expect the first shutdowns before 2014. In the meantime, the ability of China's steel producers to pass through price rises in raw material costs has diminished significantly, the analysts note (no doubt as the Chinese property bubble deflates), and hence Citi<\/span> believes we will soon see a shift towards “value in use”. This means a reversal of the trend to shift to lower quality steel products when prices rise on the back of raw material price rises, towards a trend of seeking steel from mills optimising<\/span> their operations and focusing on quality of product.<\/p>\n \n\tThe flow-through implication is for a greater preference for higher quality iron ore. Citi<\/span> thus recommends investors focus on quality producers showing good share price value and names three globally – two of which are BHP<\/span> Billiton<\/span> ((BHP<\/span>)) and Rio Tinto ((RIO)).<\/p>\n \n\tWhen it comes to pure-play iron ore producers, Macquarie has a preference for Fortescue<\/span> Metals ((FMG<\/span>)). Macquarie has also been having a look at the prospects for iron ore.<\/p>\n \n\tThe analysts acknowledge the uncertainties that have led to near-term iron ore price weakness, and note the Australian market is discounting forward prices (through stock price implication) to well below the broker's forecasts and in most cases to below current spot. Macquarie has looked at the two major factors of Chinese demand and additional global supply in assessing four different scenarios.<\/p>\n \n\tEither Chinese demand will continue to grow beyond the near term while additional supply suffers delays (good for prices), demand remains subdued but supply is delayed (middling), demand grows but supply grows rapidly (middling), or demand remains subdued and supply grows rapidly (bad).<\/p>\n \n\tMacquarie notes Chinese steel production remains at record levels and falls in inventories to date have been slow. Supply growth in the first quarter of 2012 was sluggish amidst announcements of delays and cost escalation at major projects. On this basis the analysts are favouring<\/span> the most positive scenario above.<\/p>\n \n\tThe winners in a such a scenario will be those miners both significant current production and near-term expansion potential, the analysts suggest. Hence the preference for Fortescue<\/span>, but Atlas Iron ((AGO)) also fits the bill. Were scenario number two to play out, Macquarie would shift preference to miners with big capex<\/span> spends already behind them, low gearing and competitive cost structures. Atlas ticks some of these boxes, but smaller BC Iron ((BCI<\/span>)) ticks them all.<\/p>\n \n\tWith regard to juniors, Macquarie notes Northern Iron ((NFE<\/span>)) and Grange Resources ((GRR<\/span>)) are also stand-outs under the most positive scenario. \n\tTechnical limitations<\/strong><\/p>\n \n\tIf you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, we apologise<\/span><\/span>, but technical limitations are to blame.<\/em><\/strong><\/p>\n
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