Iron ore bi-weekly newsletter July 2011

Iron Ore prices are poised for an interesting and complex situation for the coming two weeks. The iron ore prices lost its steam in the 3rd week of June and were pretty stable throughout this week.

Fresh contracts stayed at the fences and spot transactions were very thin. Weak domestic steel prices, severe floods and tight credit situation has pushed the Chinese steel makers to scale down the production and restrain from fresh iron ore procurements even though the ore inventory level at many steel mills are at low levels.

The sentiment in Chinese market is largely bearish and both the steel makers and the traders expect a fall in iron ore prices in the near future. The Chinese research agencies have also echoed the same sentiments.

It will be very interesting to see how the Chinese steel producers and Indian ore suppliers will react to the market conditions if the iron ore price movement is unidirectional. Ever since the Indian government raised the export duty of iron ore fines from 5% to 20%, the Indian market has not corrected to absorb the same. The ex-mines prices and the local transport prices were not largely affected.

In fact, to an extent, the price increase in international market helped the Indian traders to absorb the steep increase in export duty. At the current market level, both high and low grade export provides a very tight margin and are at the borderline. If the market has to fall from these levels, it will be very difficult for the Indian traders to make fresh purchase unless the ex-mines or transporting cost is reduced.

A reduction in local transportation cost is ruled out as the recent diesel price hike calls for a 10% hike from the existing transporting rates.

The Indian miners as of now are in no mood to reduce the prices as the domestic demand is strong enough and in addition, the number of operational mines are far less in numbers compared to the previous years.

On the contrary, if the iron ore prices moves up, the Chinese mills might run in to a risk of procuring cargos at much higher levels as fresh orders needs to be placed in the short term in order to maintain their inventory at healthy levels. Also, at higher price levels, the low grade ores become very much attractive, which can put further pressure on prices. At the absence of low grade supplies from Goa owing to monsoon, and Karnataka yet to take off, the Chinese buyers might face trouble in getting the required quantity.

The commodity segments in its entirety is facing a downward pressure, the bullions, leading the table. Both gold and silver lost its grounds and were testing the support levels at the close of

COMEX sessions on Friday (1st July). Gold futures broke a psychological barrier of $1500 mark and silver futures extended its volatility to higher levels. A further drop in these metals in the coming week can greatly affect the sentiments of other commodities traded globally.

Indian iron ore fines with 63.5/63% grade were quoted at $175 to $177 range and the 59/58 grade were quoted in $145 to $147. If the market falls below $174 for 63%, further drop can be expected till $170 level. A positive opening on Monday (5th July) and a few days of stable prices can push the 63% grade price to $180 to $185 levels.

Report compiled by Maya Iron Ores Pvt Ltd.