Appreciating iron ore degradation :: Macquarie Research,

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Appreciating iron ore degradation
Feature article
 We have long been of the opinion that grade degradation in iron ore is a
growing issue for the industry, particularly with the supply chain stretched to
the limit. However, with the fall in Indian exports being skewed towards the
high grade end, it is also very much an issue in the here and now. Grade
degradation has two distinct potential impacts for iron ore; firstly any
technological gains in the blast furnace could be outweighed by the need to
accommodate lower grades, a ‘reverse efficiency’ which is to the detriment of
steelmakers. Meanwhile, high cost Chinese domestic ore again needs to take
up the slack, putting an even higher floor under the iron ore spot price.
Latest news
 Base metals were mostly up in Tuesday trading, while palladium was the best
performer rising 1.9%. As outlined in yesterday’s commodities comment, we
think there are further gains ahead for palladium as auto production recovers.
 Drought-affected regions in Central and Southern China have experienced
heavy rains over the past 4 days, with Hunan, Jiangxi, Guizhou, Anhui,
Zhejiang and Hubei experiencing rainfall of 50-100mm over the past week.
While it is too early to fully gauge the impact, the forecast for further rain does
mitigate the risk of coal prices surging higher in China as hydro generation
should improve.
 The NDRC has moved to further enforce stable contract pricing and is looking
to fine producers up to 5 times of revenue earned by charging above
contracted levels. Prices set under the last round of contract negotiations
early in the year were flat compared to 2010 levels following official
intervention, although there have been reports of varying qualities and
quantities delivered under these contracts.
 In the market for manganese ore, major producers continue to think that
prices will remain fairly flat for the next six months or so but we note there is
an emerging confidence about the outlook beyond this and, in the medium
term, prospects are more promising as realistic assessments of the timeline
for substantial expansion of rail infrastructure in South Africa recede further
into the future.
 We understand some talks have now started for settlement of ferrochrome
contract prices in Q3 2011. Spot prices remain under strong pressure, with
reports of South African charge chrome selling into China at prices in the lowto-
mid 90c/lb range CIF. We continue to think the outcome will see a fall of
~10c/lb, fully reversing the headline increase that was secured for Q2
2011. South Africa charge chrome producers are reducing output but this is
for seasonal reasons, with winter power tariff rises taking effect for three
months from late May, and already anticipated in the market.
 Contract workers for Codelco working at the El Teniente mine are reported to
have stepped up protests after some contract workers were arrested on
Monday, union spokesman Marco Alarcon has said. Production at the mine
has fallen to 20-30% of capacity on Tuesday, from 40% during the preceding
Friday-Monday period.