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Bulk Commodities Prices To Fall Further; Demand Slows

November 18, 2008 at 12:08 by Mario

Commodity markets have got off to what appears to be another rough week, with BHP Billiton Ltd.(BHP) confirming it has been asked to defer up to 5% of planned iron ore deliveries this year and Macquarie Bank sharply lowering its 2009 price forecasts for most raw materials.
Even the coking coal market, so far seen tight because of some spill-over demand from earlier months when infrastructure constraints and production losses limited shipments, is eventually moving to a surplus.
Despite severe flooding in Queensland which cut production earlier this year, the coking coal market will end the year with a 11 million metric tons surplus, Macquarie’s Commodity Analyst Jim Lennon said in a report Monday.
In addition to cementing the view that the global economy could take several years to recover from the current crisis, the continuation of bad news could mean commodity prices have further room to fall before a floor is found in most cases.
“Bulk commodities are late-cycle commodities, and we can say with some confidence that they will be hit hard come negotiation time,” said ANZ Commodity Strategist Mark Pervan. In early 2008, benchmark coking coal prices tripled and iron ore prices nearly doubled on the year to record highs.
Iron ore price negotiations for 2009, between Chinese steel producers led by Baoshan Iron & Steel C. Ltd (600019.SH) or Baosteel and key global mining companies such as Brazil’s Companhia Vale do Rio Doce (RIO) or Vale, Australian miner Rio Tinto Ltd. (RTP) and BHP are expected to start soon.
That could also set the tone for coking coal prices.
Slowing demand and exports from the U.S. and Australia’s Port of Newcastle prompted Macquarie to cut its coking coal price forecast for the 2009 benchmark contract by 60% to $140 a metric ton, from around $350/ton this year.
Macquarie now expects copper to average $1.70 a pound next year, down 43% from its previous forecast; aluminum is likely to average 90 cents per pound, down 31% from its previous forecast.
London Metal Exchange copper is currently trading around $3,710/ton, down nearly 60% from a record $8,940/ton in early July, despite producers announcing project deferrals and disappointing output at existing mines.
No Respite Seen Even After Next Year
The bad news for the market is likely to stretch into 2010, Macquarie said, lowering its forecasts for 2010 by 12% to 30%.
For bulk commodities, 2009 iron ore contract prices are now expected to fall 20% for Australian fines to $115.70/ton, and by 15% for Brazilian ore to reflect changes in the freight market, Macquarie said.
That is roughly in line with those of other analysts although some, such as UBS and ANZ, are forecasting a drop of as much as 40% in iron ore prices next year.
Slowing steel demand and falling steel prices have forced every iron ore producer, including BHP now, to re-state their forecasts for next year.
BHP, which Monday said it had received requests from customers for shipment deferrals of up to 5% of its 2008 iron ore production, worth around $600 million at current contract prices, was the last major miner to officially confirm a slowdown in demand.
Last week, Rio Tinto said it was cutting iron ore production at its Pilbara mine in Western Australia by about 10%. Before that, Vale, the biggest iron ore producer in the world, said it would cut 2008 production by 30 million tons, or 9% of annual output, in response to worsening market conditions.
Fortescue Metals Group Ltd. (FMG.AU), last week said its 2008 iron ore production will come in about 10% lower than planned.
The market is likely to get worse before it gets better, analysts said.
“There are three phases. We’re in the first with the current crisis… a very uncertain environment as it’s very early days. Signs are that we’re moving downwards. For China, the direction is distinctly downward,” said Michael Dixon executive general manager at Australian minerals consultancy AME AME.
China is the biggest consumer of most bulk commodities such as iron ore and coking coal and it was slowing Chinese demand that led to the sudden deterioration of market sentiment in recent months.
“The current crisis only really started two months ago, leading on from the banking crisis, and a recovery might be up to three years away,” Dixon said.
More Steel Output Cuts May Follow
Fourth-quarter steel output cuts of more than 30% at the world’s largest steel maker, ArcelorMittal (MT), as well as Corus and other companies around the world, is leading to a sharp downward correction, with global steel production expected to be cut by 12% to 15% on year during the current quarter, Macquarie said.
Recent economic data suggest more output cuts may be likely.
Aside from the euro-zone economy shrinking by 0.2% during the third quarter, Japan’s government Monday said the world’s second largest economy had entered a recession with a second straight quarter of economic contraction, shrinking by 0.4% on an annualized basis.
Against this backdrop, demand for steel making raw materials, such as scrap, coking coal and iron ore, has “clearly collapsed,” leading to plunging freight rates and lower spot prices, according to Macquarie.
While UBS and ANZ expect iron ore contract prices to fall by 40%, while AME thinks coking coal prices will drop to about $200/ton or less.
“The production cuts among end-users highlight the downside risk to these markets, and we haven’t yet seen all likely steel production cuts,” said Pervan.

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