Iron ore supply builds, prices head for a cool-off phase

The current tightness in the iron ore sector may ease soon. According to a BNP Paribas report, the supply side is notching up gains, which will improve the scenario by the second half of 2011. The immediate effect will be on iron ore prices which are expected to cool off from second half onwards.

[caption id=“attachment_22166” align=“alignleft” width=“380” caption=“Adequate capacity in Australia and Brazil, especially at Rio Tinto and Vale, is a reason for cheer. Daniel Munoz/Reuters “] [/caption]

The brokerage report tells you more.

Chinese steel production has been a pleasant surprise. It has stayed above 700 million tonnes per annum despite softening of headline economic indicators. Contrary to expectations, smaller units seem to be unaffected by power shortages.

Since major projects are heading for a ramp-up, the tightness will go sooner than you think. Adequate capacity in Australia and Brazil, especially at Rio Tinto and Vale, is a reason for cheer. The supply flow will also be aided by expansion projects like Fortescue’s 15-million tonne Christmas Creek project and BHP Billiton’s 50-million tonne per annum RGP5 project.

BNP Paribas expects a 16% supply spurt in 2012 and 10% in 2013. Iron ore prices are likely to come down from $162 a tonne to $140. Iron ore exports, however, remain weak due to the continuation of an export ban in Karnataka.

Exports are expected to be subdued in the near term, given the seasonal monsoon weakness, procedural delays in issuance of export licences in Karnataka and tighter scrutiny by Orissa. Iron ore exports are likely to improve marginally by 8% year-on-year to 101 million tonnes, which is still lower than 105 million tonnes of 2009.