22/09/14 – Iron ore sinks to fresh 5-year low


Iron ore resumed its downward slide, sinking to a fresh five-year low on Friday amid nagging concerns about weak Chinese demand for the steel making ingredient.

The price of iron ore jumped almost 4 per cent on Monday to $85.20 on speculation Chinese steel mills had returned to the market and were replenishing stocks.

However, the gains proved fleeting with the price of benchmark Australian iron ore for immediate delivery into China falling 1.6 per cent to $81.70 a tonne on Friday.

Traders pointed to a lack of buying momentum and a drop in Chinese steel futures, as highlighted by the drop in the rebar, or reinforcing bar, futures contract, which hit a record low on Friday.
“Chinese steel mill restocking has been confined to small parcels this week and recent stimulus measures haven’t yet markedly improved sentiment,” Australia and New Zealand Banking Group said in a report.

Iron ore usually strengthens into the year-end as Chinese steel traders and producers restock ahead of the winter. But with domestic demand weak and financing difficult to obtain, ANZ said it is increasingly doubtful this pattern will be repeated in 2013.

“Fourth quarter supply and demand balances for the iron ore sector . . . look relatively ugly,” said Melinda Moore, analyst at Standard Bank, in a note to clients. “As a result, we are more concerned about fourth-quarter downward price performance than any year for the past decade – apart from 2008.”

Iron ore has dropped almost 40 per cent this year as the four big producers – BHP Billiton, Fortescue Metals Group, Rio Tinto and Vale, which all depend heavily on the commodity for their profitability – have ramped up production.

This supply has overwhelmed weakening demand growth in China, the world’s biggest consumer of seaborne iron ore, driving prices lower. If the price continues to fall it could derail or pushback plans by BHP and Rio to return capital to shareholders.

Analysts who have visited China in recent weeks say steel mills and traders are holding around half their normal levels of inventory for this time of year and have no plans to significantly restock before the winter.

There are a number of reasons for this, according to J Capital Research. These include high port stocks, weaker steel prices and the ability to hedge iron ore exposure on the Dalian commodities exchange.

High-cost producers in China and other parts of the world such as Indonesia and Iran have responded to the sharp drop in price by curtailing production. Rio Tinto estimates 125m tonnes of high cost supply will be cut in 2014, mostly in China, which will help to balance the market.

However, others are sceptical and reckon a lot of high-cost producers will prove difficult to remove from the market, particularly in China, where decisions to close state-owned mines do not depend solely on economics. J Capital estimates state-owned enterprises have increased their share of domestic iron ore production from 33 per cent at the start of the year to 41 per cent by the end of July.

Source – FT.com