--Clyde Russell is a Reuters columnist. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Dec 9 (Reuters) - It’s an observable fact that steep falls in commodity prices are often a precursor to a rally, and recently some industry executives have said this is likely next year for iron ore and coal.
Notwithstanding the obvious caveat of beware miners talking up prices of commodities they produce, there is some cause for optimism that the worst is over for two of the weakest performers so far this year.
Asian spot iron ore .IO62-CNI=SI is down 48 percent from the start of the year to Monday’s close of $69.70 a tonne, while spot thermal coal at Australia’s Newcastle Port, an Asian benchmark, has slumped 28 percent to $62.25 a tonne in the week ending Dec. 5.
The case for a stabilisation in prices followed by a modest rally next year is largely built on the view of more high-cost supply leaving the market, coupled with steady demand growth from top importer China.
Peter Poppinga, head of ferrous metals at Brazil’s Vale , told an investor briefing in London last week that the iron ore price had overshot to the downside and it will “bounce back in the very near future.”
While he didn’t specify a level he expects prices to reach, he did nominate $90 a tonne as a hypothetical price based on expected demand and supply.
At current prices about 220 million tonnes of high-cost iron ore production is uncompetitive and should leave the market, Poppinga said.
In theory, he’s correct that high-cost output should be leaving the market, and much of this is based in China.
The real question is whether this production will leave the market as fast as Vale, the world’s biggest exporter of the steel-making ingredient, and the Anglo-Australian pair of Rio Tinto and BHP Billiton bring on new supply.
The big three are all increasing output rapidly, and they are being joined by fourth-ranked Fortescue Metals Group and Anglo-American in boosting lower-cost production.
It’s likely that the new output scheduled in the next few years will still swamp demand growth, with a slower rate of growth in imports by China, which buys about two-thirds of global seaborne iron ore,
Li Xinchuang, deputy secretary general of the China Iron & Steel Association and president of the China Metallurgical Association expects iron ore imports of about 1 billion tonnes in 2015, up about 6.4 percent from this year.
Given that steel output is likely to be largely steady in 2015, the additional 60 million tonnes in iron ore imports largely reflects loss of domestic output in China.
However, there is a risk that China’s domestic iron ore industry will successfully lobby for some reduction of taxes, or other measures, to make them more competitive, just as the coal industry did this year.
Unlike iron ore imports, which are up 13.4 percent in the first 11 months of the year from the same period in 2013, China’s coal imports have dropped 9.4 percent so far this year.
This is largely because of muted demand growth leading to lower domestic prices, which has made it harder for overseas miners to compete, notwithstanding the depressed global price.
The imposition of new rules and taxes may also have led to a small reduction in China’s imports, but similar to iron ore, the main problem for coal is oversupply.
Rio Tinto head of coal Harry Kenyon-Slaney is seeing some signs of improvement in the coal market, on the back of supply leaving the market.
In an interview last week with Australia’s Fairfax media, Kenyon-Slaney said the tough times are going to last for a while yet, but the market is stabilising and the “cycle will turn.”
Rio Tinto pointed to the consensus forecast for Newcastle coal prices to rise to an average $76 a tonne next year, in line with this year’s average price, before gaining to $81 in 2016.
For this forecast to be achieved, it will take ongoing rationalisation of supply, as seaborne demand is unlikely to rise strongly, notwithstanding the shortage of coal in number two importer India.
The risks here are that the depreciation of the Australian dollar and the Indonesian rupiah, coupled with lower costs from falling fuel prices, will actually help keep some high-cost production going, thereby delaying a price rally.
There are some reasons to be optimistic that the worst is over for coal and iron ore, but much will depend on whether as much high-cost supply leaves the market as the major miners expect. (Editing by Richard Pullin)