Investors in stocks of iron ore producers may need to be cautious in the light of the recent trends in exports and prices. After managing a growth in the first two quarters of 2009, exports of iron ore from the country are estimated to have fallen by about 25 per cent in the first two weeks of September 2009, due to factors such as a spike in royalty and transportation costs and uncertain long-term contracts for export of iron ore to China.

 

Industry players have also been advocating caution at the current levels. In an interview to Bloomberg, Mr Siddharth Rungta, President of the Federation of Indian Mineral Industries, was quoted as saying that the total overseas sales declined by 15 per cent in August 2009, when compared with year-ago numbers. In the interview, Mr Rungta hinted at the possibility of India (which was until last year the major exporter of iron ore to China in the spot market) losing ground to global iron ore majors BHP Billiton and Rio Tinto. These companies, which generally trade on long-term contracts, began to aggressively enter the spot market ever since their long-term contracts with Chinese steel mills expired in March 2009. Chinese importers demanded a 50 per cent cut in the long-term contract price, which the global miners did not accede to.

 

Further fall?

Around July 2009, iron ore importers in other countries such as Korea and Japan accepted a 33 per cent price cut and, finally, the Chinese mills also settled for an interim 33-35 per cent cut in long-term contract prices. Since August, global iron ore miners have begun negotiations for fixing long-term prices for 2010. This probably is an indicator that the current year may go by without any settlement on long-term contracts being signed with China.

 

China’s current stockpiles of iron ore to make steel are at 75 million tonnes, just 0.6 per cent below levels last September. It bears mention that prices of high grade iron ore have fallen substantially from their recent peak prices of August ($112.50 a tonne), although they are trading 33 per cent above May 2009-levels ($83.5 a tonne).

 

Prices of low grade iron ore have also fallen from $69.4 a tonne to $65.8. It is learnt that many buyers in China are delaying their orders as they expect a further fall in prices. –Business Line