Miners watch how iron ore emerges from China’s winter

8 January 2018

Australia’s big iron ore miners will be closely watching how Chinese prices of steel and iron ore move following the Christmas break, with a strong end to 2017 supporting expectations that BHP and Rio Tinto can maintain their renewed focus on shareholder returns.

The price of top-grade iron ore surged more than 24% to $US72.62 between the start of November and December 29, as steel production in 28 Chinese cities was wound back as part of the Chinese government’s anti-pollution push.

The clean skies initiative has seen the price of higher grade iron ore jump sharply, as Chinese steel mills look to increase production while reducing pollution.

While iron ore future contract prices wobbled in late December, iron ore on the Dalian Commodity Exchange rose 2.7% to Friday to finish the year at 531.5 yuan, up 16.5% for the year.

“Iron ore is rising as there is expectation that steel mills would recover production and they need to make bookings ahead of that,” said Bai Jing, an analyst with Galaxy Futures in Beijing told Bloomberg.

Stockpiles rose

But the biggest question is how the Chinese prices move as shuttered steel production in those 28 cities is brought back on line.

There are some concerns around the fact that stocks of iron ore at China’s ports have continued to climb. Data from Steelhome showed stockpiles at China’s main ports rose a further 2.66 million tonnes to hit 146.23 million tonnes on December 22.

But UBS analyst Glyn Lawcock said “the Chinese winter shuts have had a better than expected impact on commodity prices [and] steel and bulk commodities in particular” and while he does see some risk of softer prices as production returns to normal, UBS has upgraded its iron ore outlook for 2018 by 7% to $U64 a tonne.

Mr Lawcock expects iron ore prices will be underpinned by China’s continued focus on curbing pollution and the big miners keeping supply in check by focusing on value over volume.

“Our confidence in early 2018 being positive for the miners and production discipline being maintained stems from the fact that miners either have elevated debt levels or memories of the past few years where prices and margins crumbled under the weight of supply or both,” Mr Lawcock said.

“We believe it is fair to say that the commodity prices we are experiencing today (in some cases above long-term levels) are trading there because of restricted supply either due to China’s winter shuts or pollution/safety concerns, or voluntary supply restriction by Western world producers. Hence there is no immediate need to grow supply.”

Further boost

The February reporting season should provide a further boost to mining investors, who watched BHP jump 23% in 2017, Rio rise 32% and South 32 rise 32%.

UBS expects BHP will launch a share buyback at its half-yearly results, with Mr Lawcock describing it as “essentially playing catch-up” to Rio, which completed a $US1.5 billion ($1.92 billion) buyback on December 27, taking its full-year returns to shareholders to $US8.2 billion.

BHP’s balance sheet is in good shape; Mr Lawcock puts BHP’s debt at $US13.8 billion at December 31, 2017, safely within its target range of $US10 billion to $US15 billion.

Rio Tinto could also give its returns to shareholders a boost in 2018 if it was to sell its Queensland coal assets, which could be worth as much as $2 billion.

South32, which launched $US750 million of buybacks in 2017, and UBS see scope for special dividends.

Source: AUSTRALIAN FINANCIAL REVIEW