London (Platts)--11Nov2011/100 pm EST/1800 GMT

Two analysts who called the recent plunge in iron ore prices believe the recent uptick in prices will be short-lived, with a "double dip" hitting the market into 2012. The view contrasts with Macquarie Bank analysts, who are sticking for now with their forecast that prices will rally.

Dragon Capital analyst Alexander Makarov expects prices of 63.5%-Fe ore to fall to $100/dmt CIF China in the next two to four months as he sees "weakening Chinese demand for steel and signs of the oligopoly on the world iron ore market breaking."

Article continues below...

Request a free trial of: Steel Markets Daily
	Steel Markets Daily provides you with Platts' expert commentary including comprehensive daily and monthly articles and news briefs on each of the critical markets -- plus, access historical prices for hot-rolled coil, rebar and other products. You will also have access to 25 daily spot market prices and monthly averages from trading hubs in Europe, North America and Asia.

The Platts assessment for 63.5%/63%-Fe fines rallied to $144.50/dmt CFR China on Friday from a low so far in 2011 of $124.75/dmt on October 28.

"It comes as no surprise that the recent collapse in prices prompted buying activity and pushed prices higher in the past three weeks, but we expect this to be a short-lived trend," Makarov said in a report published Thursday.

"Iron ore prices are currently moving up on resuming purchases from Chinese steel plants and we project an upward trend with plateau at about $140/dmt during the next two months."

The global steel sector has weakened, but Chinese iron ore output may stay steady even at prices below current levels, Makarov said.

"We can estimate that current marginal cash costs on CIF China basis are below $110/mt for at least 95% of global seaborne supply. We think the market is poised to decline to this level (which in dry metric ton terms is equivalent to $100/dmt), and expect this to happen in the next two to four months."

Makarov in August advised clients of the Ukraine-based investment bank -- in which Goldman Sachs has a minority stake -- to sell steel company shares on expectations of a "$100-150/mt" slide in steel prices over two to three months and a 30% correction in iron ore prices in two to six months.

WORLD STEEL DYNAMICS EXPECTS LOWER THAN $100/DMT

Peter Marcus at New Jersey-based consultancy World Steel Dynamics expects weaker iron ore prices again, after he forecast rightly in June that spot prices would fall in the second half of 2011 as global steel production stagnates.

"The spot price of iron ore delivered to China could temporarily fall to less than $100/dmt," a WSD report dated Wednesday said. Iron ore prices may fall to $95/dmt CFR China in December-January, only to recover again to $135/dmt in 2012-2013, provided a "booming global economy."

His long-held view that spot iron ore prices could not stay trading around the year's highs was finally proved right as price declines accelerated from September.

Meanwhile Macquarie remains long-term bullish on iron ore -- still expecting an average of $180/dmt CFR China for 62%-Fe in 2012 -- and calling the recent downward price move a "temporary blip." It sees a demand-driven price recovery leading prices back higher into next year, although it has cut its iron ore price forecast for 2011.

"Based on expectations for November and December, iron ore prices may average at $171/dmt CFR China, down from an earlier forecast of $175/dmt," analyst Colin Hamilton at Macquarie Commodities Research in London said on Friday.

Platts' IODEX 62%-Fe fines assessment fell to $116.75/dmt on October 28, losing $65.75/dmt from early September. Since then, spot prices have gradually risen as steel mills have needed to restock and contract volume uptake has increased.

Meanwhile miners Vale, Rio Tinto and BHP Billiton have recently been maximizing output, with shipments at record levels, according to production reports.

The mining-to-port costs in Brazil and Australia and historically low freight rates mean operations are still highly profitable.

Vale CEO Murilo Ferreira said when spot prices touched their recent bottom that it did not make sense to reduce production because the company has some of the lowest costs in the industry.

He said that as Vale is not a marginal cost producer, it would not be first to take output out of the market, while the company has separately warned that adjustments are possible to match demand.

All three miners have felt steel mill customer pressure to sell iron ore based on prevailing spot prices rather than contract levels, helping push further forward an industry shift to shorter-term based pricing for contracts.

A source at a big producer said that current low prices may disincentivize new projects proceeding, as financing already pressured by ongoing economic woes is further hit by reduced expectations for forward iron ore prices.

That would help the big three miners cling onto their control of seaborne tonnage for longer. Lower iron ore prices and an uncertain economic outlook may contribute to delaying significant competition as new projects in West Africa and expansions in Australia and Brazil hinge on rapid steel output growth led by China and other emerging markets.

--Hector Forster, hector_forster@platts.com

Tweet