Market fundamentals will be determined by the speed and size of the recovery from the global recession. At this stage, 2009 will be a tough year for global consumer demand, and deflationary conditions will remain until 2010. Planned fiscal stimulus plans in China, USA and a host of lesser economies will assist with demand and consumer confidence, and this is likely to effect an improvement on commodity demand in 2010.
Longer term the economy will revive, driven by the planned Keynesian government expenditure, continued urbanisation in Asia and progressive industrialisation in the wider developing world. However, global growth will be at more modest levels in comparison to the last ten years. Thus spectacular growth was driven by four principal factors, a combination unlikely to be replicated any time too soon:
* Enormous increase in the availability of credit to households and industry, driven by innovations such as securitisation of receivables, deregulation of the banking industry, credit insurance and increased acceptance of risk.
* The initial high growth rate of industrialization of greater Asia, and the consequent development of this region into the world dominant manufacturing and metal powerhouse. The impact on the world was greater than any preceding Industrial Revolution.
* Tremendous productivity growth driven by an IT revolution which provided enormous communication, data flow and data storage capability at a fraction of previous historical costs.
* Huge growth in international trade that was by and large well managed by the World Trade Organisation. The compound growth rate of 5% has been unprecedented in recent economic history.
Global GDP growth rates will recover after the recession is over, but will be somewhat more modest at around 2% per annum below the rates experienced in the last five years.
iron ore prices will reduce substantially this year, but are likely to remain at historically high prices – a decline of 44% would still only push prices back to 2007 levels, itself a record-setting year for the industry. In the longer-term, iron ore prices will be maintained by the marginal high-cost production in China, which will support above-normal industry profitability for low-cost Brazilian and Australian producers.
Global Demand for Iron Ore by Region
Additional support will also come from the abandonment of new projects and expansion plans. AME forecasts that China will soon account for over 50% of traded world seaborne iron ore imports. China is also pursuing strategic targets overseas, acquiring significant overseas equity and encouraging the development of overseas projects.
2008 was initially a glorious year for iron ore exporters, with record prices and volumes.
* Vale obtained a 65% increase for Itabira fines and a “quality premium” for its Carajas fines.
* In June, Australian producers obtained a freight premium for the first time and saw increases of around 80% for fines and 97% for lumps.
Spot producers reveled in prices approaching US$200/tonne at the peak in March 2008, but it was short-lived as steel and spot ore prices collapsed from August 2008. The “day in the sun” is over for the time being.
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