The iron ore price has begun its slow descent back to ‘normal’

The iron ore price will fall but it won’t drop off a cliff. That’s the view of analysts who are predicting a drawn-out decline for the price of Australia’s most important commodity, rather than a “sharp crunch down”.

The spot price of iron ore fell 3 per cent in China on Wednesday to $US84.99 per tonne, taking the fall over the past two days to 7.7 per cent.

Moves by Chinese regulators to cut property speculation are weighing on the prices of Chinese construction steel and iron ore prices.

While the price has held up surprisingly well in 2017, beating the expectations of most analysts, it has slid consistently since March 16 and is about $US10 per tonne lower than the peak of $US94.86 per tonne on February 21.

CBA commodities analyst Vivek Dhar said the slump marks the beginning of a gradual price decline, which he expects to settle at $US60 per tonne by the end of December.

“I think this is the beginning of a return to $US60 a tonne, but that is still some time away,” Mr Dhar said.

“I think demand will be healthy enough to keep the price supported, so I don’t expect a huge drop and I think China would want stability in its markets given this election period coming up.

“I think it will be a gradual decline as opposed to a sharp crunch down.”

Du Hongfeng, a senior analyst at research group SteelHome, said weakness in iron ore prices had been triggered by a fall in the price of construction steel in China. Rebar prices in China have dropped more than 2 per cent over the past two days.

At least six cities across the country have introduced new measures to curb speculation in the property market since last Friday, clouding the outlook for steel demand.

China’s capital, Beijing, kicked off the tightening, announcing buyers who wanted to move house or buy a second property would need to pay a significantly higher down-payment.

New restrictions were then introduced in Guangzhou, Changsha and other cities in nearby provinces.

So far this month 18 cities have announced new tightening measures, according to local media reports.

“That has prompted concern about future demand for steel and iron ore,” said Mr Du.

In late February, Chinese President Xi Jinping said at a meeting of senior economic policymakers houses were built “to be lived in, not for speculation,” sending a clear signal the central government wanted to take some heat out of the property market.

“If rebar prices keep falling that will put a lot of pressure on iron ore prices. Iron ore stockpiles are also at a record high of around 131 million tonnes,” said Mr Du.

CBA’s Mr Dhar said higher iron ore prices had been supported by that stockpile building but said this appeared “to have normalised, after a significant restocking cycle last year”.

He also expects prices to soften because of increasing supply, both from seaborne producers and domestic Chinese mines.

“[Chinese steel] demand will likely be healthy this year – in the 2 to 3 per cent range – but even then there is enough supply coming online,” Mr Dhar said.

UBS commodities analyst Daniel Morgan says the fine balance between supply and demand will play out in a “battle” over the next three months.

“We do have our forecast prices declining by the end of the year to a $US60 [average] in Q4 but Q2 is going to be a very interesting battle,” he said.

“It is between steel production which seasonally lifts at this time of year up against the end of the wet season, probably come late April, which will lift us out of this period of weaker supply.

“What is going to win – will it be the lift in demand or supply? It is hard to know.”

But Mr Morgan said he was more “circumspect” about the pace of the decline given the second quarter was “typically the tightest period in the steel and iron ore trade”.

“I would be more worried about what prices are in the second half,” he said. “I think it is too early for this to be a big fall.”

It came as Chinese conglomerate CITIC wrote down its iron ore project in Western Australia by $HK7.2 billion ($1.2 billion), “mainly due to lower forecasts for the long-term price of iron ore”. It is the third year in a row the company has recorded a write-down on the Sino Iron project.

BHP Billiton also announced it had been forced to indefinitely suspended plans for new desalination and concentration plants at its Escondida copper mine in Chile – of which it owns 57.5 per cent – because of a 42-day strike which has “made it impossible for contractors to resume their work”.

Source: Australian Financial Review

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