Iron ore spot price tipped to increase in coming months

Its most recent report on junior and mid tier iron ore companies found that Australian listed iron ore stocks have gained an average 50 per cent in 12 months, driven by the overall market recovery and rising iron ore prices.
Prices fell 12 per cent in the three months to June and 7 per cent in one month (to June 17th), partly due to concerns over the proposed new resources tax.
The iron ore spot price reached an all time high of US$186.5/t (China fines, 62per cent Fe, CFB) in April 2010 but has since dropped by 23 per cent to US$143.1/t (June 17th).
“The iron ore market is in a period of transition, in terms of pricing,” said RCR iron ore analyst, Dr Trent Allen.
“Iron ore producers began arguing strongly for more flexible pricing in the second half of 2009, when there was a growing disconnect between booming spot prices and the lower annual contract price, which was set during the GFC.”
The miners got their way in the current quarter, in which a three-month contract price was set, at almost double last year’s annual price. The contracts are now being indexed to an average spot price for the previous quarter.
“The third quarter contract price should be higher because it will reflect the high second quarter spot prices, including the all-time high spot price reached in April,” said Dr Allen.
“This will give rise to the undesirable situation of a rising contract price, lagging more recent falls in spot ore prices and steel production. The next logical step could be to abandon contract prices in favour of spot prices. The steelmakers in that situation could find it harder to forecast production costs, an uncertainty which they would likely pass on to consumers via more volatile steel prices.”
The iron ore market is relatively secure due to the strong outlook for steel. As nations develop, steel intensity per capita grows with GDP. China is approaching mid-range intensity, while India is at an earlier stage of development (relative to its population). This implies consistent or increasing steel demand. Taking a long-term view, real prices are above trend on a 50 year scale. This suggests a long term ~US¢65/dmtu, or US$44/t as new iron ore supply shifts the cost curve back towards trend.

Iron ore equity performances
Yearly equity performances of 59 Australian listed iron ore juniors (plus FMG) have tracked or outperformed the S&P/ASX200: prices gained an average 50 per cent in the past 12 months (ASX200 16 per cent), lost 12 per cent over the past three months, and lost 7 per cent over the past month (ASX200 +1.3 per cent).
The companies’ share prices, on average, are 41 per cent below their 12-month highs.
Canadian listed stocks also performed strongly, with 50 companies averaging a 12 month increase of 48 per cent including a 3 month drop of 2 per cent, and sitting 40 per cent below yearly highs. Current and near-term producers can expect to benefit in 2H10/2011 from the recent increase in ore prices.
The Australian-listed juniors have underperformed their Canadian peers since May 2010, due to uncertainty over the Australian Government’s planned Resource Super Profits Tax, said RCR.