Macquarie :: China soaks up more Australian and Brazilian iron ore

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Commodities Comment
China soaks up more Australian and Brazilian iron ore

Feature article
 November iron ore export data show weaker Brazilian exports month-onmonth but a continued strong recovery in exports to China, reflecting steel mill
restocking and apparently weaker domestic iron ore production.

Latest news
 Base metals were mostly up in Wednesday, while precious metals fell
between 2-5%.  Markets continued to digest the implications of the tax-cut
compromise in the US, with bonds selling off and the US dollar rising.
Meanwhile German industrial production jumped by 2.9% MoM and
11.7%YoY in October, with the impressive strength of leading indicators in
Germany suggesting that manufacturing should continue to grow at a solid
pace in Europe's largest economy.

 Base metals are also being supported by yesterday’s announcement by ETC
Securities that trading will start in new physically-backed ETFs for copper,
nickel and tin on Friday 10th December.  The remaining securities in
aluminium, lead and zinc will start trading in the new year.

 Physical premiums for some shipments of primary aluminium to Japan for
January-March are reported to have been settled at about $112/t CIF.  This
would mark the lowest level in six quarters and the fourth consecutive quarteron-quarter decline.  However, European and US premiums remain firm in tight
physical markets with a lot of metal still locked up in financing arrangements.

 Latest data from the China Iron and Steel Association shows that output at its
member mills (which account for ~83% of Chinese crude steel output)
continued their slow rise, up 0.6% sequentially in the last 10 days of
November to 491mtpa.  However, for the month as a whole CISA mills output
fell 0.7% MoM in November, and remains below the 500mtpa annualised rate
last seen in early October.  Steel Business Briefing has reported that Ningbo
Iron and Steel have been informed by the Zhejiang provincial government that
their production cut should be continued through the end of the calendar year.
We reiterate our view that the energy reduction measures are leading to a
large degree of pent-up production in China, and thus a strong ramp up
should be anticipated when restrictions are removed.

 The China Securities Journal has reported that the country will invest 3-4trn
RMB in railways during the 12th 5 year plan, up from 2.2trn RMB over the
past five years.  While the railways themselves only consume ~10mtpa of
steel, the announcement does reinforce our view that there will be no
slowdown in infrastructure investment despite the end of the stimulus package
implemented during the global financial crisis.  In our view, the need to
rebalance the domestic economy and stimulate economic development in the
Western and Central provinces will require sustained infrastructure spend
over the coming period, with the infrastructure sector as a whole likely to
consume ~200mt of steel in 2010.