The price of iron ore, a key steelmaking ingredient, fell to its lowest level in at least seven years on Tuesday, as steel demand in China continues to weaken.
The price of iron ore for China delivery hit $43.4 a tonne, according to the Steel Index. That is a record low in its data going back to the end of 2008, when iron ore prices moved on to a spot market from bilateral pricing contracts.
The drop comes after steel prices in China hit record lows in recent days. Analysts at Macquarie estimate that Chinese steel demand will fall 5.7 per cent this year, and will drop again in 2016. The global steel industry needs to lose about 170m tonnes of capacity, they estimate — the equivalent of the entire production from western Europe.
The iron ore market is suffering from oversupply from the big miners — BHP Billiton, Rio Tinto and Vale, which have kept producing in the face of weaker prices. Inventory at ports and mills in China has also been increasing, with steel held at major mills rising by 4 per cent last week, according to MySteel estimates.
“We need to lose supply across pretty much every commodity market at the current time,” said Colin Hamilton, an analyst at Macquarie.
That is not happening in iron ore. Instead, two large new iron ore projects, Roy Hill in Australia and S11D in Brazil, are expected to start producing over the next year.
In the near term, working through the inventory held in China is also likely to take longer with weaker demand.
“Given tough downstream conditions, tight credit in the steel and iron ore industry and little anxiety of underlying supply shortages, we remain cautious towards restocking,” analysts at UBS said.
Iron ore prices could drop further if steel capacity in China starts to shut down as mills face increasing losses. This month, Chinese steelmaker Tangshan Songting Iron and Steel said it would cut production, the country’s second 5m tonne enterprise to shut down due to debt pressures.
But analysts caution that output reductions on a larger scale may be gradual. China’s steel exports, while they have led to trade tensions, are also likely to continue in the near term despite a rising chorus of trade complaints.
“In the shorter-term, cash flow and debt pressures may still incentivise production at a loss,” according to Adrian Lunt, assistant vice-president of commodities at Singapore Exchange, which lists an iron ore derivatives contract.
In other commodities, metals rose on Tuesday as oil prices rebounded after Turkey shot down a Russian fighter jet. Copper rose 3 per cent, and nickel bounced 7 per cent.
Source: http://www.ft.com/