Despite a very modest bounce last week, iron ore prices returned their worst month since October 2011 in August, falling 24%.
This brings the metal's decline for the year to date to 36%, falling largely on the back of weakening demand for the steel-making ingredient from China, analysts say. But, while expectations are still to the downside for prices, some analysts believe the situation is unlikely to get too much worse from here.
Speaking to Bloomberg on Friday, about the slight jump in prices on the day, Ric Deverell, global head of commodities research at Credit Suisse AG in London, said "It does look like prices have probably overshot to the downside. I would characterise what we're seeing as signs of stabilization, but it's probably too early to say that we're out of the woods."
Part of the problem at the moment is the high volume of stocks sitting in Chinese ports.
As Standard Chartered's Judy Zhu wrote in a recent note, "iron ore is similarly piling up at various ports across China — a clear indication that steel demand growth has slowed considerably as mills turn cautious and refuse to hold inventory. As of 17 August, total iron ore inventory at China's ports was 96.8 million tonnes (equivalent to one month‟s domestic use), only 4% lower than the record high of 100.9mt reported in early February 2012."
The bank expects inventories to remain high until October when it is hoped that better macro economic data will improve demand but, as it points out, the sentiments expressed by iron ore traders, steel mills, base metals producers, traders and consumers hasn't been very positive.
"They all stated that they do not see any improvement in overall demand despite the People's Bank of China having cut benchmark interest rates twice this year and more investment projects having been approved. In addition, they are all far from confident that the Chinese economy will accelerate in the near term. We are cautious on iron ore prices near-term, owing to high inventory levels and weak sentiment that we expect will prevail for at least another four to five weeks."
Contrary to the mounting stockpiles at ports within China, however, Standard Chartered reports that the country's steel mills have very low levels of iron ore stocks — equivalent to just one month's use at present versus two month's use in 2011.
The group notes that these steel mills do not expect a pick-up in demand anytime soon but, added, "… it surprised us that even the naturally bearish consumers expect a moderate recovery in iron ore prices in Q4."
"We also note that although the low stocks held by steel mills are a bearish factor for iron ore prices in the near term, it could be a catalyst for price recovery once mills start to increase output."
Where to from here?
According to Standard Chartered, The present weak demand from China's steel mills suggests that the near-term risks for prices remain to the downside, with trading firms ready to offer discounts.
The bank has revised its price forecasts for Q3 down to USD 110/t (period average) from the previous USD 130/t, and for Q4 to USD 115/t from the previous USD 160/t.
But, it says, "The next four to five weeks can still be challenging for iron ore prices, with traditional Chinese buyers showing little interest. We expect spot prices to stay below USD 100/t for a while before improving demand from steel mills pushes prices up around the end of September."
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