Economic update

17 October, 2011

Spot iron prices falling, contracts to follow

Weekly iron ore prices vs. benchmark contracts

200 160 120
TSI less freight

USD/t
Sources: Westpac Economics, Bloomberg, SGX Asiaclear

USD/t

200 160 120

Spot iron ore prices price have fallen quite sharply over the last 2 weeks, down 8% to $158/t. In the last 4 weeks, Australian spot nes, as measured by the TSI, are down almost 12% landed in China. While the Dec qtr iron ore contracts will be broadly in line with the Sep qtr contracts, if the spot prices maintain the current level for the remainder of the Dec qtr, the contracts would fall around 13%. But that is not the end of the story. Brazilian prices have fallen by a larger 16%mth and historically, where Brazilian prices go Australian prices tend to follow. There are also further signs of an easing in Chinese demand for steel. Rebar prices are down almost 5%mth while hot rolled coil is down 6.3%mth. Furthermore, Chinese steel scrap prices are down 5%mth & Chinese domestic iron ore price have fallen almost 6%mth. Given the greater than normal rise in inventories over the last 6 months (+12%) Westpac has been looking for a correction to iron ore prices. As the correction unfolds we reafrm our forecast for a low in spot iron ore prices around US$140/t in mid 2012.

80 40 Oct-09

Brazil less freight Australian contract price (fines 62%)

80 40

Apr-10

Oct-10

Apr-11

Oct-11

In the Sep quarter, spot (less freight) averaged US$166 vs. contract price of $170/t so the Dec contracts remain well supported. But the recent correction means that the spot price (less the freight to China) is trading at $146/t which, if sustained, would see the Mar contract falling by around 13%.
Westpac Institutional Banking Group Economic Research

Justin Smirk, Senior Economist, ph (612) 8254 9336

economics@westpac.com.au www.westpac.com.au

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