The dramatic recovery in iron ore fortunes

Iron ore had a torrid time in the second half of 2012. The commodity sold off very sharply as fears over the slowdown in Chinese economic growth began to be realised. The sell-off was likely exacerbated by destocking at Chinese steel mills and declining confidence in Europe. Iron ore bottomed in early September, having fallen from more than US$140 per ton to under US$90 (accounting for around 62%). Since the trough, iron ore has rallied more than 70% to US$154.9 per ton as of this morning. Sentiment has recovered, global economic growth prospects have improved, Chinese steel mills have restocked and the iron ore price has staged a dramatic recovery.

To add to the improved price environment, there has been an increase in merger and acquisition (M&A) activity in the sector in recent months. First, the Chinese company Hanlong looks close to finalising a takeover of Sundance Resources, an Australian-based iron ore company with a significant asset in the Republic of Congo. Second, International Mining and Infrastructure Corporation announced on 2 January that they had made an approach to Afferro Mining, another London-listed West-African iron ore play. With many projects constrained by large capex (capital expenditure) needs, it is likely that there could be more M&A in the year ahead.

With the price environment improving and M&A activity picking up, 2013 could potentially be a good year for the iron ore companies.