Iron ore prices may extend their slide after reaching their lowest level in five years after China’s industrial production growth in August slipped to its lowest level since the 2008 global financial crisis.
The data from the world’s largest consumer of the steel-making material is likely to add to gloom for several high-cost miners that are struggling to cope with an onslaught of supplies from large low-cost miners such as BHP and Rio Tinto.
Prices of iron ore have fallen by 40% this year as China’s demand has been blunted by a real estate slowdown, though some Chinese steel mills have taken advantage of cheaper raw material to step up their exports.
“From a market fundamentals point of view, I would say it (China’s weak industrial output data) just confirms that demand is growing more slowly than supply,” Christian Lelong, a Goldman Sachs analyst based in Australia told The Wall Street Journal.
He said that reports of mine closures began in the second quarter of the year, and their estimates are that around 30 million tons of production capacity in China may close by the year-end.
Outside of China, Indonesia has virtually ceased to export, and some small producers may have shut down in Canada, Sweden, Australia and a mine in Brazil has been idled, he added.
Mr Lelong said that around 40 million tons of sea-borne iron ore capacity outside of China could close next year because of oversupply, equivalent to 3% of sea-borne annual supplies.
“The period of low prices will affect all exporters, which have benefitted from years of very high prices. So far this year, we have already seen the closure of some capacity in many regions including Australia, Indonesia and Brazil,” he added.
Morgan Stanley said in a report that the price of iron ore could drop to as low as $70 per ton from the current level of $82 per ton, after seeing two weeks of consistent declines.
However, it added that prices may rebound towards $90 per ton by the year-end as China’s seasonal demand typically weakens, before picking up again in the fourth quarter.
A Shanghai-based trader, who did not want to be identified, said that the pressure on iron ore has also mounted with fewer banks willing to give credit for metal-backed financing after the suspected fraud at Qingdao Port in June.
“The iron ore market is in the midst of a transition without precedent in recent commodity history, with the long-expected displacement cycle happening both earlier and more aggressively than anticipated,” said another report by Macquarie Research.
It added that with the “displacement cycle” likely to continue over the coming two years, only occasional price bounces into three figures should be expected in the coming years, rather than occasional dips below $100/per ton in China.
Source: The Wall Street Journal
