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China steel ‘crisis of confidence’ hits iron ore

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    05 Feb 2015

    Morgan Stanley is expecting iron ore prices to average $US79 a tonne this year but said its “increasingly bullish forecast” depends on an expected seasonal lift in China’s steel industry activity.
    China's steel industry is experiencing a "crisis of confidence" that will affect iron ore prices unless activity picks up after Chinese New Year, according to Morgan Stanley

    It expects iron ore prices to average $US79 a tonne this ye’ar but said its "increasingly bullish forecast" depends on an expected seasonal lift in China's steel industry activity.

    "How this steel industry responds after Chinese New Year until its summer peak is now critical for iron ore's 2015 price outlook," analysts including Tom Price wrote in a February 3 report.

    The benchmark price for iron ore fell to fresh lows of below $US63 a tonne last week, around 20 per cent below Morgan Stanley's full-year forecast.

    Morgan Stanley said China's key steel product prices have fallen as much as 15 per cent since mid-December and are now at lows not seen since the global financial crisis.

    The analysts said instead of preparing for a first-half expansion of steel production, there are reports of furnaces being idled or winter maintenance programs being extended indefinitely, noting that while the sector's caution may be protecting its profitability, it posed a risk for iron ore prices.

    "Despite an abundance of relatively cheap, high-grade seaborne iron ore, together with the announcement of a wide range of steel-intensive infrastructure and property projects by China's central government over recent months, the steel industry of China appears to be experiencing a crisis of confidence," the analysts said.

    "Any faltering in China's steel production rate is now a new bearish risk for our unchanged iron ore price forecasts."
    Morgan Stanley's forecasts are higher than most after a string of analysts took a knife to their forecasts in the first few weeks of the year. Citi has a bearish forecast of $US58 a tonne for the year while the Bureau of Resources and Energy Economics estimates an average of $US63.

    But it wasn't all bad news from the bank. The analysts said an estimated 170 million tonnes a year of production capability, or around 12 per cent of 2014's trade, was removed from the over supplied market in the last 12 months and a number of external factors had shifted in the miner's favour, including the exchange rate, lower oil prices and reduced freight costs.

    "We regard such relief as fleeting though," the analysts said. "Since the majors are still competing with each other to deliver as much ore into the trade as possible."

    Iron ore exports from Port Hedland during January totalled 36.7 million tonnes, an increase of 8.5 million tonnes, or 30 per cent, compared to January 2014, the Pilbara Ports Authority said on Wednesday.
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