Iron Ore Monthly Monitor Spot Prices Move Higher. Outlook Remains Positive. $X

• What’s New — China spot prices continue to move higher, reaching $148/t this week (63.5% Fe, dry). Contract price parity is +120-130% (Fig 2). We maintain Buy ratings on Brazil iron ore suppliers Vale and CSN. Near-term fundamentals
remain positive with the market forecast in deficit until 2013 (Fig 20).

• Benchmark Price Negotiations — Investor consensus seems to be for a +80-100% increase. Vale is moving towards an agreement with Japanese steel mills based on quarterly index pricing, according to various news reports. The new mechanism would be based on the Platts IODEX and adjusted for product quality and freight. A major increase for the Apr-Jun 2010 quarter would be positive since this will define the index baseline. Negotiations with Europe and China appear to be more difficult. Vale is flexible on pricing mechanism, but adamant that spot prices are clearing prices and determined to get full value for its product. Customers in Europe or China who prefer a 12-month contract may have to pay a premium price. Steel mills do not have much leverage in an under-supplied market.

• Supply — Chinese imports of iron ore reached 96mt in Jan-Feb, +21% y/y and the highest levels ever. Brazil's market share of China imports slipped under 20%, the lowest level since Mar-09. But overall exports from Brazil were strong with improvements in shipments to Europe (+225% y/y) and Japan/Korea (+85% y/y). Export data suggests that European steel mills still need to restock in2010/11.

•Demand — Global steel production rose to 108 mt in Feb-10, +30% YTD, the same tons as peak level in Feb-08. China’s steel production continues to surprise on the upside, reaching 50mt in February, +25% YTD. Non-Chinese production is running at 75-85% of peak levels.
•Freight — Freight prices remain moderate with Brazil-China at $26/t. This is despite China's record iron ore imports and high port congestion. New capesize supply is expected to keep rates low in the foreseeable future.

• Recent Sector Developments — The BHPB-Rio Tinto JV may be facing delays on regulatory approval. Chinalco is buying into Rio Tinto's Simandou project in
Guinea. This asset has big potential (170mtpy+) but requires very significant infrastructure investment. Europe steel makers (Eurofer) are to ask the EU
Commission to investigate possible anti-competitive pricing in iron ore.

• Outlook — The short/medium-term outlook for iron ore remains very positive with limited new supply in the next 2-3 years (Fig 21). Citi forecasts have the market in deficit until 2013. Spot prices should remain very strong while China maintains steel production at 50mt per month or above.



Iron Ore Monthly Monitor