PERTH (miningweekly.com) – Contract iron-ore prices were likely to fall during the fourth quarter of this year and remain flat, or decline slightly, during 2011/12, equity research company Resource Capital Research (RCR) reported.

However, third quarter prices were likely to be higher, with the three-month contract price expected to reach up to $160/t, which was above current spot prices for imports into China.

RCR argued that this differential would place further pressure on the contract system and would add impetus to those  asserting that contract pricing in the iron-ore market should be abandoned in favour of spot pricing – a proposition supported by BHP Billiton.

“The iron-ore market is in a period of transition, in terms of pricing,” said RCR iron-ore analyst, Dr Trent Allen.

He noted that iron-ore producers began arguing strongly for more flexible pricing during the second half of 2009, when there was a growing discontent between booming spot prices and the lower annual contract price, which was set during the global financial crisis.

“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.”

Allen said that the third quarter contract price would be higher, as it reflected the high second-quarter spot prices, including the all-time high spot price reached in April, of $186,5/t.

“This will give rise to the undesirable situation of a raising 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.”

He added that steelmakers in that situation would find it more difficult to forecast production costs, an uncertainty which they would likely pass on to consumers through more volatile steel prices.

RCR said in its report that the iron-ore market was relatively secure, owing to the strong outlook for steel. As nations developed, steel intensity per capita increased along with the gross domestic product.

China was approaching mid-range intensity, while India was at an earlier stage of development. This, RCR noted, implied consistency or increasing steel demand.

Taking a long-term view, real prices were above trend on a 50-year scale, which suggested a long-term price of $44/t as new iron-ore supply shifted the cost curve back towards the trend, RCR said.

EQUITY PERFORMERS

Yearly equity performances of 59 Australian listed iron-ore juniors (including Fortescue Metals) have tracked or outperformed the S&P/ASX200, as prices gained an average 50% in the past 12 months, lost 12% over the past three months, and lost 7% over the past month.

The companies’ share prices, on average, are 41% below their 12-month highs.

The Australian-listed iron-ore juniors have underperformed their Canadian peers since May 2010, owing to uncertainty over the Australian government’s planned resource super profits tax (SPT), said RCR.

The SPT was an extra 40% tax on mining profits in excess of the ten-year government bond rate, which currently stood at around 6%. Planned to start in July 2012, the SPT in its current form will lower the net present values of Australian mining projects by up to 30%, RCR warned.

Canadian listed stocks also performed strongly, with 50 companies averaging a 12-month increase of 48% including a three-month drop of 2%, and sitting 40% below yearly highs.

RCR stated that current and near-term producers could expect to benefit in the second half of 2010/2011 from the recent increase in ore prices.

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