REPORT FROM SHAW BROKER// F N ARENA
Further to that there is a press report in West Australian about Russian Interest to buy 20% of FMG when the price is right (who will tell that value)?
Funny as recently CITI said SELL to FMG (Am I right to recollect ?)
Any way here u go
The Iron Ore Surge Continues
14/03/2008 By: FN Arena
Fortescue Metals ((FMG)) will not wait for its railway line form the Pilbara to Port Hedland to be completed. Completion was originally slated for May or earlier,
but inevitable delays have set this target back. Instead, Fortescue intends to truck its iron ore to port from the end of the line as it creeps closer. There is no time to lose. (
Hey Forum Guys please read my post few days back. I am an idiot and no brainer but did say the same on my own observation . But why I then @#$@ lost so much in recent share market ?)
There is no time to lose because the iron ore price is running amok, and if Twiggy Forest wants to be able to crystallise his status as Australia's richest man then he needs to start selling into this market as soon as possible. Analysts have now moved ahead to forecast prices for the 2009, 10 and 11 Japanese financial years, expecting further increases in the first two before the iron ore price levels out.
We now know that Brazil's Vale - the world's largest individual producer of iron ore - has settled with the Japanese and Koreans on price increases for Itabira fines of 65%, and of 71% for the higher grade Carajas fines. While these are significant increases, Merrill Lynch analysts are surprised Vale didn't twist arms further. China is currently being forced to buy in lower grade Indian ore at spot for as much as US$216/t. The new Carajas price represents only US$146/t. Chinese buyers will expect to pay the same as their neighbours.
The answer probably lies in the speed with which Vale settled with the Japanese and Koreans, the analysts suggest. Vale is presently attempting to merge with Swiss mining giant Xstrata and needs to settle a deal with Swiss-based metal trader Glencore (Marc Rich's creation) which owns 34.6% of Xstrata. So it was better to sort out the iron ore price with expedience.
Analysts agree that its fair to thus assume BHP Billiton ((BHP)) and Rio Tinto ((RIO)) will negotiate a 65-71% price increase as well. It is understood the two Aussies will be pushing for more, given the Brazil-Australia freight differential. Australia currently receives US$37/t less for its iron ore than Brazil because of an antiquated agreement based on the fact it's a lot further to Asia from Brazil. The differential is no longer justified, so the Aussies are expected to push for a price rise of up to 100%. However, the Asians are likely to stand firm and despite world iron ore supply constraint they can now wave a potential US recession - and a subsequent drop in steel demand - in BHP's and Rio's faces. Negotiations are still underway.
As are negotiations between BHP and Rio, as the former tries to swallow the latter. A BHP Tinto would then become a bigger iron ore producer than Vale and thus in a better position to dictate terms. But that's not going to happen before negotiations are over for the year, if at all.
So analysts believe the two will have to settle on an equivalent price increase this year, but not yet an equivalent price. What happens thereafter will depend on two factors - the supply/demand balance, and the possible introduction of an iron ore index.
It is China driving demand. In 2007, China represented 80% of the growth of iron ore exports from Brazil/Australia, or 46% of the total. Imports were 384mt in 2007, up 17.6% from 2006. Merrill Lynch is forecasting 446mt of imports in 2008. ABN Amro notes Chinese steel production is forecast to maintain its current growth trend, as new capacity additions are only replacing the closure of smaller, inefficient mills. The analysts also suggest the higher costs of both iron ore and coal should be able to be passed on into steel prices, meaning there won't suddenly be a big drop in demand at that end.
On the supply side of the equation, constraint of supply has nothing to do with a lack of ore and everything to do with insufficient infrastructure and spiralling costs. All of Vale, BHP and Rio are planning capacity expansions from next year, with Vale hoping to go from 296Mtpa to 450Mtpa by 2013, BHP from 135Mtpa to 235Mtpa, and Rio from 180Mtpa to 350Mtpa (and don't forget Fortescue's targeted 100Mtpa or greater). But it all requires more equipment, labour, rail and port expansion, and new processing plants. Merrills notes Vale's last expansion cost US$112/t - twice as much as the company's previous expansion.
But another bombshell may soon hit the seaborne iron ore market. Merrills coyly suggests BHP is coercing Chinese steel giant Baosteel to support and help develop a global traded iron ore index. Apparently BHP is no longer writing new individual benchmark contracts and will only renew at an "agreed annual market price". This is seen as a precursor to the index. Iron ore is the only major commodity left without an index.
What this means is that producers and consumers will be able to agree on contract prices across a forward curve. What it also means is that speculators could then enter the market for paper-traded iron ore. To date, an investor wishing to "play" the iron ore market has had to be content with investment in shares of iron ore producers. Create an index, and the next thing you will have is derivatives. The prices of all commodities have surged recently ahead of consumer demand because of the growing popularity of investment in ETFs and other products.
With the JFY08 Australian price increase expected to be 71%, Merrills is now forecasting another 20% price increase in JFY09. The analysts suggest this forecast is "at the top end of consensus", with the current average suggested at 14%. However, GSJB Were is also expecting 20% and Citi recently shifted to as high as 30%. Merrills does, however, suggest its forecast is conservative.
Thereafter, Merrills sees another 10% increase in JFY10 (consensus minus 4%), a flat price in JFY11 (consensus minus 20%), and then falls of 25%, 20% and 20% respectively in JFY12-14. At this point, increased production should see iron ore move into surplus.
The good news is that Merrills believes the share prices of Australian iron ore producers are not yet reflecting such near term increases. Macquarie chimes in by suggesting that despite general global equity market weakness, certain sections of the resources sector continue to offer a safe haven.
(Who are Merrills ? They lost billions and now saying others to learn from them - joke)
This article was kindly supplied by FN Arena. As such, it may not represent the views of egoli or SHAW Stockbroking. egoli and SHAW Stockbroking do not warrant the accuracy of the article and take no responsibility for the views expressed in the article.