Global investment bank Morgan Stanley has downgraded its price forecasts for bulk commodities and warned that the spot price of iron ore could fall as low as $US83 a tonne in the coming months.
In a dour sign for BHP Billiton, Rio Tinto and Fortescue Metals Group, Morgan Stanley today told clients that the spot price of iron ore – which has fallen below $US100 a tonne for the first time since 2009 – could fall by a further 16 per cent. A 16 per cent slide would imply a price of $US83 a tonne.
“We estimate that spot iron ore prices for 62 per cent Fe fines could have between 7 per cent and 16 per cent further downside from the current level of about $US99/t,” said Morgan Stanley analyst Brendan Fitzpatrick.
“Similarly, hard coking coal prices could have downside of 5 per cent to 8 per cent from the current level of $US164 a tonne free-on-board. So there is still risk to be contemplated for these miners.”
The warning about the outlook for Australia’s two largest exports comes as the debate about the future of the mining boom rises after BHP Billiton last week deferred billions of ‘mega’ expansion projects, blaming rising costs and lower commodity prices. Mining and horse racing magnate Nathan Tinkler also pulled a $5.3 billion bid for east-coast coal firm Whitehaven Coal.
Along with mining stocks, mining services stocks have felt the wrath of the market’s bet the investment boom in new liquefied natural gas, iron ore and coal projects may cool from 2015 as expansions slow and marginal projects are shelved.
Morgan Stanley’s Peter Richardson said that the “sharp raw material price declines” since mid-July were caused by a collapse in Chinese steel prices and aggressive margin compression following continued weakness in demand and the over-production of crude steel.
“In our view, prices of steel making raw materials can recover in fourth quarter 2012 and in 2013, but spot prices for both iron ore and coking coal first have to fall below the marginal cost of seaborne (not Chinese) production to drive out the short-term supply overhang,” he said.
“In addition, Chinese steel mills have to complete finished product and raw material de-stocking to stabilise both steel and raw material prices while a stimulus-driven demand recovery has to take hold to trigger a restocking cycle.”
Macquarie analysts last week agreed that prices would ultimately rebound, saying iron ore prices look “increasingly oversold” and would rebound once the “present panic” subsides and the stocking cycle for steel and related raw materials starts to turn in China.
But any sustained weakness in the iron ore price would weigh on earnings and the balance sheets of Australia’s iron ore miners, including Atlas Iron and Fortescue, which analysts have warned may require more than $1bn of additional debt to complete its ramp up to 155 million tonnes a year by June.
“If the benchmark averages below $US110 a tonne for full-year 2013, we see Fortescue getting tight for funding,” said Mr Fitzpatrick.
Morgan Stanley cut its 2013 iron ore forecast by 14 per cent to $US133 a tonne and its hard coking coal bet by 10 per cent to $210 a tonne.
Source: The Australian