Sun, Aug 06, 2017 - Page 14 News List

Iron’s Goldilocks moment means profits without glut

Bloomberg

A truck carries iron ore excavated from the Lebedinsky GOK open pit mine in Gubkin, Russia, on July 13.

Photo: Bloomberg

The world’s biggest producer of iron ore said the industry is enjoying a Goldilocks moment with prices generating a tidy profit, but not enough to lure much new supply.

“The market is in a sweet spot right now from US$60 to US$70,” Vale SA chief financial officer Luciano Siani Pires told Bloomberg Television on Thursday. “It is a price which does not incentivize too much swing capacity to come back and it’s a very profitable range for major mining companies.”

Prices of the steel-making ingredient have see-sawed this year, rallying to almost US$95 in February before tumbling to US$53 in mid-June as glut fears resurfaced.

Now they are back above US$70 after an uptick in demand from Chinese steel mills.

However, prices probably will average US$50 in the final three months as falling steel prices hurt mills’ margins, Barclays PLC said.

India’s JSW Steel Ltd this week said that prices might go as low as US$40.

Vale disagrees. It is betting prices will stay in a US$60 to US$70 range for the rest of the year supported by still “very strong” demand and supply “that is a little more tame,” Siani Pires said from Bloomberg’s Rio de Janeiro office.

For Vale — even more so than its main rivals in Australia, Rio Tinto Group and BHP Billiton Ltd — the differences in price outlook are a big deal.

Each US$1 drop in iron ore has a US$350 million impact on the Brazilian company, the chief financial officer said.

That in turn affects its ability to bring down a US$22 billion debt load.

While China’s demand outlook remains bright, underpinned by infrastructure spending, growth is set to return to “more normalized” levels from the current rate of about 5 to 6 percent, he said.

“We’re positive about China and we never shared the views that the country would collapse,” Siani Pires said.

Spot ore with 62 percent content delivered to Qingdao was at US$72.93 per dry tonne on Thursday, after hitting US$73.70 earlier this week, the highest since April, according to Metal Bulletin Ltd.

The raw material rose 13 percent last month after a 14 percent gain in June, paring this year’s drop.

Futures in Asia climbed on Friday, with the most active SGX AsiaClear contract rising as much as 1.6 percent and that on Dalian Commodity Exchange adding 2.3 percent, signaling further gains in the benchmark spot price.

GOLD

In the gold market, when the going gets tough, the tough get into cheaper exchange-traded funds (ETFs).

Even in its best month since February, bullion gained only 2.2 percent last month, and concern is mounting that rising interest rates might crimp further gains.

That is helping drive investors who want to continue owning the metal toward lower-cost funds.

Bullion held by SPDR Gold Shares, the largest ETF backed by the metal, have shrunk to the smallest in more than a year, while holdings in the cheaper iShares Gold Trust are near an eight-month high.

Costs that come with owning gold through ETFs are gaining more attention as bullion struggles to compete with other assets such as equities that are attracting more money.

Spot gold on Friday fell more than 0.7 percent to US$1,257.07 per ounce, down 0.2 percent for the week.

Citigroup Inc last week said investors should brace for price declines later this year, while BNP Paribas’ Harry Tchilinguirian, the most accurate bullion forecaster in the second quarter, said rising interest rates will hurt the precious metal’s appeal.

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