Iron Market Update (February 18, 2013)

Spot prices for benchmark iron ore (with 62-percent iron content) are holding above $150 per metric ton (MT) after rebounding from $86.70 in September — a three-year low.

The metal’s ongoing strength could soon start translating into higher profits for major producers. If prices remain above $150 per MT through to the end of the first quarter, pure iron ore producer Fortescue Metals Group (ASX:FMG) could see its earnings jump 30 percent, while Rio Tinto’s (NYSE:RIO,ASX:RIO,LSE:RIO) profits could rise 12 percent and BHP Billiton’s (NYSE:BHP,ASX:BHP,LSE:BLT) earnings could gain 7 percent, according to figures from Commonwealth Bank and UBS quoted in a February 9 Sydney Morning Herald article. If prices stay over $150 through to the end of the second quarter, BHP’s profits would surge 52 percent, Rio’s 22 percent and BHP’s 12 percent.

“We could be on the verge of the first earnings upgrade for 18 months,” the analysts wrote. “We are at the end of the downgrade cycle and the market should again begin focusing on the valuation upside.”

Meanwhile, Canadian investment firm Fraser Mackenzie continues to forecast an average 2013 iron ore price of $120 per MT. However, research analyst Wojtek Nowak is keeping an eye on that forecast in light of iron ore’s recent strength. “That may be a conservative figure,” he said in a February 13 phone interview. “We’ll get a better picture as we head into spring.”