London, February 2011
Iron ore contract prices are expected to jump to a record $165 per tonne in the second quarter, reflecting soaring spot prices buoyed by tight supplies and robust demand from top importer China, a Reuters poll showed. The projected second-quarter price for Australian fines with 62 percent iron content, free on board, represents the median in a poll of 10 analysts. It would mark a 17 percent rise from January-March and the biggest contract price since the industry shifted to quarterly pricing last April after ditching a 40-year-old annual system.
Contract prices are forecast to peak in April-June before easing over the following quarters as global supplies recover, the poll showed. For the year, contract prices are seen climbing 25 percent to $153 a tonne.
Increased global steel output, firm Chinese demand and tight supplies should boost iron ore prices this year, said Mark Pervan, senior commodity analyst at Australia and New Zealand Bank.
"There's a lot of dynamics suggesting there's probably more upside risks to prices than downside risks. There is supply coming online but we're still maybe one to two years away from some of the larger expansion coming through."
Spot iron ore prices have rallied since the start of 2011, pushing key indexes to record levels above $180 per tonne IODBZ00-PLT .IO62-CNI=SI and pointing to higher contract rates for the second quarter.
* Tight supplies, strong China demand behind surge
* Contract price seen at average $153/T in 2011, up 25 pct
* Prices seen falling in 2012 as supply rises
Vale and Rio Tinto , the world's two biggest iron ore miners, fix their quarterly contracts using index-based prices in the past three months a month before the start of a new quarter.
UNSUSTAINABLE?
Tight supplies from India, the world's No. 3 iron ore exporter which sells nearly all of its material via the spot market, had helped spur the rally in prices.
India's southern Karnataka state had banned iron ore exports since July and another state, Orissa, the country's biggest producer, is also looking at halting exports to preserve more of the material for domestic steelmakers.
India's Supreme Court is due to decide by mid-February on whether to lift the Karnataka ban and analysts say removing the ban could sap the rally in iron ore prices and weaken Orissa's bid.
That could see spot prices drop from the second quarter, suggesting lower contract prices for July-September, analysts said. This year's projected additional seaborne supply of 20 million tonnes, expected to come onstream in the second quarter, should also knock prices off record levels, they said.
"There's a potential for correction into the March and April period," said Graeme Train, commodity analyst at Macquarie in Shanghai.
"China's steel production will probably peak out around that time and iron ore inventories will be relatively high by then, so you'll probably see things cooling off a little bit."
Iron ore prices may peak this year and fall from 2012 as new supply comes into the market, said Colin Liang, analyst at Bank of America-Merrill Lynch in Hong Kong, who expects contract prices to drop 8 percent next year from 2011, on average.
Global seaborne supply of the key steelmaking component has been increasing by 20 million to 40 million tonnes in recent years, but production expansion plans by global miners Vale, Rio Tinto and BHP Billiton could boost annual supply by around 100 million tonnes starting 2012, analysts said.
More supply and a potential slowdown in steel demand from China, the world's biggest consumer and producer of the alloy, due to policy tightening "would mean that current prices may be unsustainable," said Paul Galloway, senior mining analyst at Sanford Bernstein.
A shortage in coking coal, another ingredient in producing steel, after floods ravaged top exporter Australia, could also cut steelmaking and therefore dent demand for iron ore, said Galloway.
Australia accounts for almost two-thirds of the world's metallurgical coal exports, most of it destined for steel producers in Asia.
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