Aus iron ore surge to gain more traction in Q4

Australian iron ore exports have boomed in the year to date, with there few signs that things are likely to slow down.  In particular, Q4 looks like it will be very large given Rio Tinto have opened up additional capacity and prices look to be well bid as Chinese steel production remains solid and inventories a little low.

The official data released by the ABS are unfortunately reported on a slightly different basis to major producers, although with a little fiddling the numbers can be reconciled by making some assumptions for moisture.

As the chart on the left shows, strong exports in the YTD have mostly been driven by BHP Billiton and Fortescue exporting a lot more  through Port Hedland.  October statistics were yet to be released at the time of writing, but they should be big as both producers record the unusual seasonal uplift.

Rio Tinto should start to play a much bigger role in the supply surge in the quarters ahead. Expansion of infrastructure to increase capacity towards 290mtpa has mostly been completed. Shipments from Cape Lambert in particular should be very strong in the coming quarter.

This should bring the total increase in iron ore exports in 2013 to ~90mt.  With all the big producers continuing to ramp in 2014, supply gains next year should be around 110mt.

Such a big supply surge so far hasn't dampened iron ore prices, which have actually risen a little in the last few days to $136/t.  Solid steel production rates and relatively low stocks should make sure everything is ok for now.

Iron ore should also be solid in 2014 even if growth is a bit lower, because it has been so much stronger than anticipated in 2013.  As I wrote about here, the bringing iron ore prices sharply lower is about the cumulative erosion of high cost supply in China.  Because no real inroads were made this year, it seems unlikely that supply growth next year will eliminate high cost supply unless demand is drastically weaker than expected.

That doesn't mean that prices won't fall through points in the inventory cycle through the year.  But on average, prices should hold up well for the year as a whole.

While the iron ore picture has remained solid, we have seen a big sell of in freight after the incredible surge in September.

We are still at higher levels than when the rally began, and the ongoing strength in iron ore shipments and prices should keep things steady at these levels.  But it does seem unlikely that we quickly return to the exuberance seen or month or so ago, with the market able to mobilise excess capacity and speed up ships on the price spike.