Iron Ore Market Update

A 7% price increase in 2008/09 09 (a 20% fall previously), and a 10% decline the year after (-15%) in iron ore prices by analyst Citigroup Investment Research (CIR). In 2010/11 CIR now expect a 30% fall (0% previously). The market for iron ore is expected to be close to balance in 2007, only moving into modest surplus in 2008. The analyst expects stronger Chinese demand, both in 2006 and forecast, is the main reason for the market environment. In April, when the 9.5% increase in contract prices is implemented, the delivered price of Brazilian ore will be on a par with current Indian spot. The US$6.80/t increase in Indian export tax is expected to be partially passed on as higher spot prices. Higher spot prices provide scope for further gains in contract prices next year. Characteristics which have secured high returns and low volatility in the iron ore market are: relatively stable negotiated prices, consolidated ownership, high barriers to entry, and a skewed cost curve. Each of these characteristics is under some pressure. The capital cost doubling in the Pilbara, this means that Greenfield projects elsewhere are more competitive. This report is based on a paper presented at the Citigroup-Informa Iron Ore & Steel Forecast Conference, Perth - 28 February-1 March 2007.