Singapore, 18 October 2011: Reuters

It may just be bravado but iron ore producers seem remarkably sanguine about the recent precipitous drop in the price of the steel-making ingredient. It could be that the miners remain confident because they have yet to see cargoes being cancelled, or that China, the buyer of two-thirds of seaborne iron ore, imported the most since January last month.

It could also be that they are looking through short-term price weakness in spot iron ore to a bigger picture of the long-term industrialisation of China and India, and still tight supplies for the next couple of years.

Finally, it may also be that they know that steep falls in spot iron ore prices have been followed by equally strong rallies that have taken prices to higher peaks. Spot iron plunged about 14 percent between Sept. 7 and Oct. 14, taking the price below $160 a tonne for the first time in 11 months.

It wasn't the first price slump this year, coming after a similar decline from the record $193 a tonne on Feb. 16 to $165 on March 16. That decline was followed by a 12 percent rally in the next four weeks, but this gain pales in comparison to the surges in 2008-09 and 2010-2011.

After spot iron ore fell almost 69 percent to $56 a tonne in November 2008 after the global financial crisis struck, it then rallied 238 percent in the next months. This jump was followed by another drop, this time of around 38 percent over the three months to July before a 65 percent rally to the record high in February this year.

Graphic of Rio Tinto's Q3 output HERE:

For those with a technical bent, using a simple relative strength index, whenever iron ore drop below the 30 level that indicates oversold, it generally responds with strong rallies.

The current RSI is down to 3.7, the lowest since it dropped below 1 in November 2008, just as the price bottomed out before prices rallied for an extended period. But as interesting as technical indicators and price history may be, I doubt miners such as BHP Billiton, Rio Tinto and Vale base their optimism on iron ore on such factors. Rio Tinto reported record iron ore sales for the third quarter and presented a bullish picture of demand and expanding supply. "Whilst we are mindful of current market volatility, the fundamentals are holding up well," Rio Tinto Chief Executive Tom Albanese said in the company's quarterly report last week.

Brazil's Vale said last month it expects to produce iron ore at full capacity next year and while prices are volatile, they haven't had any cancellations or delays to shipments. This sentiment was echoed by BHP Billiton, which said last week it also hasn't had any cargoes cancelled and is producing as fast as it can.

Fortescue Metals Group, Australia's third-ranked iron ore miner behind Rio and BHP, blamed uncertainty in Europe for weakening iron ore prices, adding that demand from China will prop up market fundamentals.

So, is this optimism by producers justified, and the current slump in iron ore prices indeed just a blip amid a strong demand outlook? Certainly, China's imports of 60.57 million tonnes in September speak to a solid market, but the noises from traders is that last month might be as good as it gets for a little while.

Cargoes were brought in before the October holidays in China, and lower steel prices are further discouraging buyers from taking more iron ore. Steel rebar prices in Shanghai slumped 11 percent in September and have extended losses in October amid concern that a slowdown or renewed recession in Europe and the United States will hurt global demand for the metal, extensively used in growth-sensitive products such as consumer goods and cars.

Any signs that recession fears will turn to reality will drive steel and iron ore prices lower, but so far the base case seems to be the world economy manages to cling to tepid growth, especially if the Europeans manage to sort out their sovereign debt woes.

In this case, the rose-coloured spectacles of the iron ore producers may have provided the clearest view of the iron ore market.

Ends --

By Clyde Russell, Reuters market analyst – for Commodities Now with permission.

The views expressed here are his own.