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Iron ore prices to climb on stronger China demand, J.P. Morgan Cazenove predicts

Geopolitical risks were again at the forefront of investor concerns last week as a new round of sanctions and tariffs rattled global markets.

The Trump administration stepped up pressure on Iran and Russia, reimposing a first round of economic sanctions on Iran, which it accuses of supporting terrorism and engaging in a ballistic missile nuclear-related program.

A similar move against Russia came amid renewed allegations that the country was to blame for the U.K. nerve-agent attack on former double agent Sergei Skripal and his daughter. The U.S. 1991 Chemical and Biological Weapons Control and Warfare Elimination Act mandates punishing countries that use chemical weapons in violation of international law.

China was targeted in a new round of tariffs as the U.S. is preparing to collect a 25% import tariff on an additional US$16 billion of Chinese-made goods from Aug 23.

China responded with a retaliatory move, announcing that a 25% tariff will apply on a range of U.S.-sourced imports including gasoline and diesel.

Price ring

Industrial metals widely ended the week in the green, while precious metals shifted lower.

Iron ore gained 5.4% to US$64.00/t. However, it is still trading 20% below levels a year ago.

Most base metals also recovered. Aluminum rose as much as 5.1% to US$2,118/t, while nickel increased 2.6% to US$13,804/t. Copper gained 0.3% to US$6,199/t, while lead stayed flat at US$2,137/t.

Gold and silver both booked marginal declines, shifting 0.2% and 0.6% lower, respectively. Gold closed the week at US$1,212/oz.

Talking points

Stronger-than-expected demand from China is set to push up iron ore prices in the second half, according to J.P. Morgan Cazenove.

In an Aug. 10 note, the bank's analysts raised their third-quarter and fourth-quarter estimates for iron ore 62% Fe fines by 5% to US$68/t and by 8% to US$65/t, respectively, and subsequently upped their 2018 average estimate by 3% to US$68/t from US$66/t.

The move comes amid expectations that China's 2018 steel production will reach 890 million tonnes, an increase of 7% year over year. The bank previously expected China steel output to accelerate by 4%.

"In our view [supply/demand] conditions remain tight. Our revised 2018 forecast paint the picture of a deficit market. This is demonstrated by the rise in marginal Chinese supply to fill the demand gap," the team said. "Overall, iron ore prices have approached US$70/t on the back of the positive sentiment around stimulus, and tight [supply/demand] environment."

The bank also increased its third-quarter estimate for iron ore 58% Fe fines by 1% to US$43/t, while iron ore 62% Fe lump is now estimated to reach US$83/t in the third quarter, up 4%, US$85/t in the fourth quarter, up 6%, and an average of US$83/t for the total year, up 2%.

In July, J.P. Morgan Cazenove raised its long-term price forecast for iron ore based on a review of "next generation" development assets in Australia's Pilbara region. Citing lower project returns and a structural increase in grade differentials, the team raised its long-term estimates for iron ore 62% Fe to US$60/t from US$50/t and for 58% Fe to US$45/t from US$40/t.

The same month, RBC Capital Markets took a contrary view and cut its iron ore price outlook amid expectations that challenging economic conditions in China will lead to a temporary but meaningful price correction.

The bank revised down its estimate for 62% Fe iron ore China in the second half to US$49/t from US$65/t, expecting iron ore to average US$59.23/t for full year 2018, compared to US$64.25/t previously. On a quarterly basis, the outlook was cut to US$50/t from US$60/t for the third quarter and to US$47.50/t from US$70/t for the fourth quarter.

Financings

Ivanhoe Mines Ltd. secured an interim loan of US$100 million from CITIC Metal Group Ltd. to ensure its exploration and development efforts continue apace. The loan bears interest at 6% and is expected to be repaid from proceeds of a C$723 million investment agreement that Ivanhoe signed in June with Citic Ltd. unit CITIC Metal Co.

Ukraine-focused iron ore pellets-maker Ferrexpo PLC increased a 2017 pre-export finance credit facility to US$400 million from US$195 million and extended the tenor to four years from three. BNP Paribas and Deutsche Bank arranged the facility, which includes seven other international lenders. The cost of the facility remains 450 basis points above U.S. Libor.

Baoshan Iron & Steel Co. Ltd. launched an offering of short-term bonds valued at 2 billion Chinese yuan, or about US$292 million, with the proceeds to be used on bank loans. The maturity of the notes was set at 50 days and the interest rate at 2.37%.

Chinese coal producer Kailuan Energy Chemical Co. Ltd. plans to launch a bond repurchase program for the 1.5 billion Chinese yuan, or about US$219 million, debt offering it issued in October 2014 on the Shanghai Stock Exchange. The repurchased debt, with an interest rate of 6.3%, will be paid out Sept. 26.

Shandong Gold Mining Co. Ltd. intends to launch a green bond offering to raise up to 1 billion Chinese yuan, or US$146 million, for operational capital related to a gold concentrate recycling project and a green mine project in eastern China. The interest rate will be set between 4.8% and 5.3%, and the maturity will be less than five years.

Yunnan Tin Co. Ltd. seeks to launch a bond offering to raise up to 1.5 billion Chinese yuan to repay bank loans and for general working capital. The nonpublic debt offering will be issued to no more than 200 qualified investors, and the maturity of the bond will initially be set at three years, renewable for an additional three years.

Universal Stainless & Alloy Products Inc. entered into an amended and restated five-year, US$120 million asset-based lending credit agreement with PNC Bank. The deal will increase the maximum line of the U.S.-based specialty steelmaker's revolving credit facility to US$110 million and reduce the term loan facility to US$10 million. It also includes a more favorable interest rate structure.