Iron ore prices rebound to safer level for Ukrainian miners

Prices for iron ore fines in China rebounded from their trough reached in early April, having grown 34% since then to USD 62.6/t (CFR, China port), according to the Metal Bulletin news agency. Prices still remain 12% lower from the year start and averaged at USD 60.2/t year-to-date, which is 49% lower than the average in the same year-ago period.

Meanwhile, iron ore pellet prices have recovered 5.6% from their low reached mid-April to USD 89.6/t in China port (CFR). They are still 19% lower from the year’s start, and averaged USD 97/t in this YTD period, or 39% lower than the average in the same year-ago period.

Iron ore stockpiles in China port plunged the most throughout 2015 during the first week of May, by 5.5 mmt to 84.3 mmt, a level seen previously in January 2014 and November 2012, indicating ongoing sharp destocking of iron ore in China.

Roman Topolyuk: A mix of reasons can explain the recent appreciation of iron ore. Most of the largest global iron ore producers indicated they might slow down the pace of iron ore capacity expansion. Local production of iron ore in China, most of which is loss-making at current prices, has started to decline (-13% yoy in March 2015 to 105 mmt). A bunch of announced stimulus measures for the Chinese economy, including the recent interest rate cut by the central bank by 25 bps to 5.1%, is set to provide additional drivers for iron ore consumption in the region.

It’s yet to be seen whether the recent bounce of iron ore prices proves to be long-lived, as overcapacity on the market has yet to be fixed. Weakness could persist, or prices can stabilize at the current level.

For the moment, Ukrainian iron ore miners can enjoy being above the breakeven level. Pellet prices have grown above USD 87/t, what we call a safe level for Ferrexpo (FXPOLN) that provides the company with enough liquidity to service and repay the debt, other things equal. However, we need to see price stabilization at this level to change our negative view on Ferrexpo’s bond, as the margin from USD 89.6/t to USD 87/t is rather thin.

The average YTD iron ore prices are almost in line with our annual projections, which were the basis of our USD 363 mln EBITDA forecast for Ferrexpo and USD 1,651 mln forecast for Metinvest (METINV). At this stage, we reiterate our negative view on both issuers’ bonds.

Источник: Конкорд Капитал