>IRON ORE: Strong Spot Market Conditions Persist (CITI)

■ What’s New — Spot prices in China for imported iron ore have weakened a little in recent days to around $130/t (from $135/t), but are still up 25% in the past month and 60% in the past 4 months. Pre-buying of iron ore and steel has been a factor, but spot prices are expected to remain robust as suppliers prioritize contracted customers. Seaborne demand in 2010 is likely to exceed the previous peak in 2008. Investor sentiment is overwhelmingly bullish, with most believing that ratetightening in 2010 will not slow steel production.

■ Spot Prices — Spot iron ore prices are at $135/t (63.5% Fe, dry), up from $85/t in mid-September. Contract parity would require +90-100% price increases (Figure 2). Spot prices are not a direct indicator of where contract prices will settle, but it gives a clear indication of how tight the market is. Contract typically settles below spot in bull markets and at/above spot in bear markets. Investor consensus on the contract price is around +30-40% for 2010, and +10-20% for 2011.

■ Demand — Chinese steel production was flat m/m in December at 47mt. Total China steel production was 566mt in 2009 (+13% y/y) and annualized 600mt in 2H09. CIRA's China steel analyst is looking for production as high as 650mt in 2010. This is very bullish requiring another 80mt of 63%-Fe supply vs 2H09 – and this capacity does not exist. China at 650mt would lift global crude steel output back to 1.3bt, similar levels to 2008.

■ Supply — Brazil iron ore exports rose to 24mt in December, +7% vs November. 4Q09 exports were below 3Q09, as lower sales to China offset higher sales to Europe and Japan/Korea (Figure 6). Australian producers reported record production for 4Q09 but leaving little room for incremental supply in 2010. BHPB sold nearly 50% of sales at spot prices vs contract. Chinese domestic ore production has recovered rapidly reaching the peak of the year in November.

■ Market Share — Brazil is maintaining 20-25% market share of Chinese iron ore imports in recent months. Australia has 40-45% share. Vale is looking to maintain current tonnage into China in 2010, with incremental sales coming from other regions. Australia has limited new capacity, and low-grade domestic China iron ore will have to fill the supply gap if bullish demand forecasts are realized.

■ Recent Sector Developments — Baosteel names a new price negotiator. Producers are negotiating with Japan, sidelining China, according to a Financial Times report. BHPB discusses new Africa JV with Mittal. Vale's ferrous director estimates seaborne market >900mt in 2010.

To read the full report: IRON ORE