1 de septiembre de 2016 / 14:22 / en un año

COLUMN-Have rumours of the iron ore market's death been greatly exaggerated? Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Sept 1 (Reuters) - Rumours of the death of the iron ore market appear to have been greatly exaggerated.

Consider the case of Australia's Atlas Iron, which has just released its financial results for the year to June 2016.

The junior producer is still struggling, witness a net loss of A$159 million ($119.68 million), but that's a massive improvement from the $1,378 million loss booked the previous year.

Indeed, it is something of a miracle that Atlas is still operating at all. At one stage last year, the company had idled all three of its mines in response to the collapse in the iron ore price .IO62-CNI=SI to below $50 per tonne.

But fast forward a year and after a complete operational and financial overhaul, Atlas is still in the business of producing iron ore.

The same survival story is playing out globally.

The spectrum of countries supplying iron ore to China, the world's biggest buyer, contracted sharply last year but is widening again this year.

Imports from Sierra Leone disappeared in May 2015 but recommenced in January. Also back as a supplier is Liberia after a near eight-month hiatus, while imports from other opportunistic suppliers such as Vietnam and Venezuela are increasing again.

The reason, of course, is the recovery in the iron ore price from those 2015 lows to a current $60 per tonne.

The consensus thinking is that this recovery can't last, but then the recent history of the iron ore market is a repeated thwarting of the consensus view.

THE ONLY WAY IS DOWN?

On paper the consensus view that iron ore is headed lower again looks pretty watertight.

Iron ore supply growth wasn't as aggressive as expected during the first part of the year.

The "big three", namely Rio Tinto, BHP Billiton and Brazil's Vale, registered minimal year-on-year growth in production rates in the first six months of this year.

The loss of supply from Samarco after the calamitous dam collapse at the Brazilian mine is part of the reason but both BHP and Rio experienced technical issues and have marginally tweaked their guidance accordingly.

But production from the "big three" low-cost operators is only going to rise going forward from here.

And it will do so just as demand in China starts slowing as the mini stimulus package initiated by Beijing at the start of the year loses momentum and the country starts to make good on its pledge to eliminate capacity in its leviathan steel sector.

An early warning sign of these turning price drivers would appear to be the build in Chinese port stocks SH-TOT-IRONINV, which at 105 million tonnes are back at levels last seen in late 2014.

The battle for survival in the iron ore sector, in other words, looks set to resume with the "big three" saturating a shrinking market and forcing out plucky but ultimately doomed minnows such as Atlas.

PRICES UP, PROFITS UP, PRODUCTION UP

But consider again those high and rising iron ore stocks. What the figures don't tell you is the detailed breakdown by type of iron ore.

What if most of the stock build has been of lower-grade material that is accumulating because Chinese buyers are searching for higher quality?

That certainly seems to be part of the equation, tallying as it does with a widening of the premium for 61.5-percent ore over 58-percent material.

And why are they getting so picky? Because, it seems, they can afford to be.

The lift in domestic steel prices this year has boosted Chinese mills' bottom line, or in the case of the "zombie" plants, generated some much-needed cash flow.

That has not only allowed buyers to become more choosy but has incentivised a new acceleration in steel production rates, as it always does in China.

National steel production in July was 2.6 percent higher than it was a year ago and the cumulative total over the first seven months was only a marginal 0.5 percent off the pace of 2015.

Both mills and iron ore producers can thank Beijing for still directing economic stimulus down "old-economy" channels such as infrastructure spend, as it did early 2016.

If the consensus is right, however, everything changes once the stimulus winds abate.

Lower demand feeds through to lower steel prices, which in turn feed through to lower steel production and less iron ore purchases.

LEANER AND MEANER

But will it work out that way?

Chinese steel prices may be signalling more than the current supply-demand drivers within China.

After all, if domestic demand were so strong, why are exports still rising, up 8.5 percent over the first seven months of this year?

Steel price strength might also be down to future expectations, as might be expected of a commodity that is now traded on the Shanghai Futures Exchange.

And key to future expectations is Beijing's commitment to eliminate excess capacity in the face of mounting international pressure to rein in exports.

The target is 45 million tonnes this year and 100-150 million tonnes in five years.

There are plenty of sceptics as to whether Beijing can hit those targets and whether it will be enough, given China's own steel producers association CISA has previously estimated there may be double that amount of excess capacity in the system.

But however much ends up being cut, it will be a positive for those remaining.

The Chinese steel sector will be leaner and meaner and history has shown that when Chinese mills' profitability improves, as is happening right now, their production tends to improve as well.

The irony here is that the very measure meant to stem higher steel exports may end up encouraging more of them.

That would not be good news for steel mills everywhere else. But it might be good news for embattled iron ore miners such as Atlas. ($1 = 1.3286 Australian dollars) (Editing by William Hardy)

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