FMG 1.30% $16.42 fortescue metals group ltd

citi iron ore

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    source: daily email from citigroup, please D Y O R , thx

    Iron Ore
    Supply Demand Update: The Race for Cut Backs
    ƒæ Surpluses Continue to Build ¡X Recent iron ore production cuts are insufficient to
    offset announced steel production cuts and forecasts of negative steel production
    growth in 2009.
    ƒæ Falling Steel Production in 2009 ¡X Our steel team forecasts negative steel
    production growth (-4.2% YoY) for 2009 and there is further downside risk if the
    global economy continues to deteriorate. Chinese steel production has fallen
    sharply (down 7% in September) and we now believe the recovery will be delayed
    into 2010.
    ƒæ Iron Ore Response ¡X Australian and Brazilian producers have sharply curtailed
    output given demand weakness. Low grade, high cost Chinese domestic
    production growth has stalled. Yet not all producers are curtailing production
    given high margins. Despite production cuts we continue to forecast surpluses in
    2009 and subsequent years.
    ƒæ Quality Counts ¡X Discounts for imported ore with high impurity levels could again
    increase. Alumina and phosphorus are of particular concern and in an
    oversupplied iron ore market steel makers could become more discerning.
    ƒæ China Imports ¡X Chinese imports have finally fallen, long after inventories have
    built up and demand has slacked. October imports fell a massive 22%m/m. Iron
    ore inventories are only just off peak levels of 76Mt back to 71.6Mt.
    ƒæ China Prices ¡X High inventory levels and demand collapse have been weighing on
    the spot market. Spot prices are currently US$61.55/t down from peaks of
    US$200/t. Recently there have been signs of life with prices in Hebei improving
    slightly, leading to the first increase in 4 months.
    ƒæ Conclusion ¡X Iron ore is highly leveraged to China. Slowing industrial production
    growth and reduced crude steel production in China will see the iron market in
    meaningful surplus in 2009. This will place considerable pressure on the
    upcoming negotiations. We maintain our expectations of a 20% decrease in
    2009/10. The gap between spot prices in China and the delivered contract price
    of Australian ore implies price fall of 35% for parity
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