Forget gold and base metals – iron ore may be the place to be

Shortage of supply coupled with high demand and continuing growth in Far Eastern steel production could see a big increase in iron ore contract prices next year.

LONDON - 

With predictions of price increases for iron ore next year ranging from 25 percent to 100 percent, an investment in this sector may prove to be one of the best bets of all if one assumes Chinese and Indian growth continues at the current rate. It also suggests that the world's biggest diversified miners, BHP Billiton, Rio Tinto and CVRD - all of which generate huge returns from their iron ore businesses are set for further big earnings increases in the year ahead consolidating their respective positions as world mining leaders.

Current iron ore supply demand is very tight and China, the world consumption leader by a long way, has low inventories at its ports and stockpiles.

Much of the speculation over the likelihood of high iron ore prices has come from reported analysis by Merrill Lynch and JP Morgan, both of which reckon that next year's contract prices for the big producers with the Chinese steel mills will be negotiated at around a 25 to 30 percent increase and Merrill feels even a 50 percent increase or more in contract prices is not out of the question. At this level profit increases for the big miners will be vast.

Supply is seen as not meeting demand up until the end of the decade at least, and it could be the marginal supplier who will benefit most as the steel mills bid up the price to meet demand. Already new Australian iron ore miners like Fortescue (ASX: FMG), which plans to start shipping iron ore in May, and Portman (ASX: PMM) - a supplier to China and Japan from the Cockatoo Island and Koolyanobbing properties - saw big share price increases yesterday on the speculation.

According to a Bloomberg report today benchmark prices may rise 30 percent to a record $66.40 a tonne next year, from $51.47 in 2007, according to the median forecast from eight analysts.

Another report in Aspermont's MiningNews.net reported the Merrill Lynch analysts as saying that should BHP and Rio Tinto be able to agree to a landed cost (including freight equalisation) of $128 a tonne, and assuming no rise in freight costs, the effective price applicable to Australian producers would be around $100 a tonne.

Should industrial growth in the Far East continue at or near the current rate, the supply/demand imbalance is likely to continue until the end of the decade leading to even higher achieved iron ore prices for the next three years.

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