Iron-Ore Price Negotiations

Rio Tinto has reached agreement with Japan’s Nippon Steel on JFY10 iron ore prices.

The agreement is as follows:

Iron ore fines – US¢97/dmtu down 33% from US¢145/dmtu

Iron ore lump  US¢112/dmtu down 44% from US¢202/dmtu

(dmtu – dry metric tonne unit)

We had assumed price reductions of 35% for fines and 40% for lump, hence the contract prices are roughly in line with what we had expected. We believe the result is ahead of consensus expectations which ranged from 30-50% reductions for both fines and lump. The removal of the contract pricing uncertainty should also be a positive for most of the iron ore companies.

The biggest leverage to the news (aside from BHP and RIO) is FMG and MGX, the largest of the independent iron ore producers. AGO and MMX should also benefit from the removal of the uncertainty surrounding prices. Our preferred pick is FMG.

China: Vital Signs From The Market

There is encouraging, albeit tentative, evidence that Chinese growth may soon stabilize.

The Chinese macro data will almost certainly remain weak over the next couple months. However, there are signs of improvement at the margin. The most recent purchasing managers’ surveys have edged higher in both the export orders and industrial production components. In addition, share prices of Chinese real estate developers and steel makers have outperformed strongly, suggesting the government’s growth-rescue policy is having a positive impact. Similarly, real estate companies are reporting a significant increase in transactions, auto sales appear to be stabilizing after sharp declines in previous months, and Chinese iron ore imports began to resume its upward trajectory in January. Bottom line: Asset classes that have been increasingly sensitive to China’s growth cycle in the past decade have been enjoying an impressive rally as of late, although we are watching for further signals to suggest an economic recovery is gaining momentum.

Source – BCA Research

Glimmer of Hope – Baltic Dry Index

Giving a glimmer of hope, the Baltic Dry Index (BDI) – measuring freight rates for iron ore and other bulk goods – jumped by 40% last week due to increased Chinese demand for iron ore. The Index has gained 125% over the past two months after plunging by 94% since its May high. The chart below illustrates the close relationship between the BDI (red line) and Reuters/Jeffries CRB Index (green line). (Not shown, the trends of the BDI and US Treasury yields also follow more or less the same path.)

Tricom Today 6-2-09

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The market is up 28 slightly underperforming the 56 point rise predicted by the SFE Futures this morning. All sectors up. Property leading the way up 3.2% with Stockland Group up 5.8% after recent savage falls. Banks all up between 1-2% responding to a solid rise in the US banks overnight. NAB gave a trading update with no disasters. News Corp down 5% as they slash their earnings guidance and report a shabby set of interim results. Resources up over 1% as BHP and FMG keep rising on the theme of higher shipping rates and iron ore volumes and prices. Iron ore stocks having a moment in the sun. Small resources stocks up despite the fall in metals overnight Kagara Limited up nearly 11% early on. Nickel stocks strong on the China theme.Gold doing well on the higher gold price. Newcrest and Lihir up 3.5% on the open. Oil stocks mostly up on the slightly higher oil price.

Tricom Today 5-2-09

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The market is down 14, dropping off as the morning progresses – underperforming the 14 point rise predicted by the SFE Futures this morning. Resources up 4.6% – most other sectors down. BHP and RIO up 5.2% and 7.6% early on. Fortescue Metals up 9% on the open. Most the miners up on the strong base metal prices and research from one broker suggesting the iron ore market is improving with BHP saying Chinese dstocking of iron ore had run its course. Gold stocks strong on the higher gold price. Industrials down 4.1% . Lend Lease has placed $302m of shares overnight at 605c and fallen 17.2% to 560c putting the placees over $20m underwater. Qantas. capital raising went through near the bottom end of the placement range at 185c and the price is down 17% to 190c this morning. Placees are just above water. Leighton Holdings up 2.7% on the back of winning a $475m contract in Abu-Dhabi. Banks down between 2-4%. UK banks had a bad night and there are concerns over Obama.s plans for financial resurrection.