Iron ore continues decline

Iron ore has fallen again, nearing the second lowest point on record since SteelIndex began tracking prices in November 2008, and close to the lowest point since fellow iron ore price tracking Metal Bulletin began keeping score, when the price hit its trough at US$44.59 in May 2009.

The price has moved to a four month low, with the Chinese port of Tianjin recording a 3.2 per cent fall to US$45.80 per tonne.

This marks the lowest point this year since July when iron ore traded at US$44.10 per tonne,  and a slide of close to 10 per cent in a single month.

Spot prices were even worse at the Port of Qingdao, where it sank 4.5 per cent to US$45.58 per tonne.

Much of this is due to the ongoing oversupply affecting the market, as the major miners continue to post new production records despite collapsing prices, in part driven by the Brazilian iron ore mine tailings disaster, and cuts in Chinese steel mill outputs.

With prevailing market conditions many are predicting this iron ore pain to continue well into the future.

Macquarie Bank is expecting “extremely weak” industry sentiment, while Goldman Sachs predicted further significant losses for the metal into next year.

“We think it’s going down significantly,” Katie Hudson, managing director and senior investment manager at Goldman Sachs Asset Management Australia told Bloomberg.

“The major producers are adding incremental volume at around $20 a ton, that gives you a sense of where the vulnerability is.

“We have a more cautious view on the iron ore price today that reflects both our concern about increasing supply and what we see as a  more modest demand environment,” Hudson said,

 “The iron ore price has got significant downside risk from here.”

Vice president for Citigroup’s China commodities research group, Ivan Szpakowski,  also pointed to a new recent low for the metal of US$40 per tonne next year.

According to Szpakowski, the slowdown in Chinese demand coupled with oncoming oversupply is likely to drive down the price to US$40 per tonne or lower by the end of the March quarter next year.

Australian economist Saul Eslake posited further downside for the metal for the next two years.

BHP’s vice president of iron ore marketing had similar views, expecting continued decline for a number of years before finding their new level below US$50 per tonne.

This is being driven by what is an unprecedented drop in Chinese steel demand.

Deputy head of the China Iron & Steel Association, Zhu Jimin, said banks are tightening lending and losses are stacking up.

The steel mills are facing a massive oversupply coupled with a sinking price and slowing local demand.

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said.

However, this has not dismayed major miners.

Rio Tinto’s Sam Walsh said the pessimism rampant in the market has not fazed the miner.

“There are lot of pundits saying that growth will be slower than the government will be expecting,” Walsh told Bloomberg Television, after China set a 7 per cent growth target at its fifth plenary meeting.

Instead he pointed what he believes are realistic forecasts by the nation, as opposed to the 6.57 per cent predicted by Bloomberg, remaining optimistic.

“It’s a very volatile world and markets and investors and analysts are responding to things that are happening on a sort of daily basis,” Walsh said.

“You’ve really got to step back from that to look at what are the long term trends and what’s actually happening with commodities. I’d suggest that people should stop looking at what’s happening on a daily basis and focus on the overarching trends.”

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.