Iron ore has fallen through the US$50 per tonne barrier, strengthening bearish sentiment in the market.
Last night the price at the Chinese port of Tianjin slipped 2.6 per cent to US$49.50 per tonne, the lowest since mid-July, bringing to a head a more than 10 per cent downwards slide experienced by the metal over the last fortnight.
This is a massive reversal from the rallies seen earlier in the quarter and builds upon the bearish stance on iron ore.
Earlier this week Goldman Sachs predicted significant losses and continued iron ore gluts into next year as the metal’s weakness continues.
“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,
She outlined a drop to below US$50 per tonne for the long-term view.
“The iron ore price has got significant downside risk from here.”
Goldman is not the only group bearish on the metal.
Last week vice president for Citigroup’s China commodities research group, Ivan Szpakowski, 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 thanks to record production rates from Vale and BHP is likely to drive down the price below US$50 per tonne by the end of this year, and to US$40 per tonne or lower by the end of the March quarter next year.
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.
This growth may slow even more, as China’s leaders gather for its fifth plenary meeting, which outlines the furutre planned economic growth of the nation.
Should the country lower its growth target to below 7 per cent, it will do so for the first time since the late 1970s.
According to JP Morgan, China’s commitment to doubling GDP from 2010 to 2020 requires an annual growth rate of 6.5 per cent over the next five years.
“We expect commodity demand to remain challenged by China’s moves to rebalance away from construction/investment-driven growth and toward consumption growth. This has exposed serious overcapacity in the sector, particularly in early-cycle commodities – steel, cement and coal,” JP Morgan said in a note.
The infrastructure plateau is expected to continue for a minimum of a decade, only increasing the grim market outlook for iron ore.