Posted on 25 Nov 2015
Iron ore sank to the lowest level in at least six years amid speculation that mills in China are cutting back steel output, hurting demand for the raw material while supplies from the biggest miners expand.
Ore with 62 percent content delivered to Qingdao fell 1.9 percent to $43.89 a dry metric ton, the lowest in daily data dating back to May 2009, according to Metal Bulletin Ltd. The commodity is headed for a third annual retreat, and Tuesday’s fall eclipsed the previous low of $44.59 set in July.
For “low-cost producers, it makes sense for them to continue to increase production,” Ivan Szpakowski, a commodities strategist at Citigroup Inc., said in a Bloomberg TV interview on Tuesday, referring to the largest miners. “They’re still profitable.”
Iron ore has been battered this year by rising output from the world’s biggest miners including BHP Billiton Ltd., Rio Tinto Group and Vale SA and faltering demand for steel in China, where mills account for half of global output. Goldman Sachs Group Inc. said last week that the global iron ore market is oversupplied, with steel consumption in China remaining weak. Policy makers in Asia’s largest economy have been attempting to steer the economy towards consumer-led growth and services.
“The market has underestimated the demand destruction from the economic rebalancing in China,” Zhang Yifan, head of foreign exchange and commodities at Guotai Junan Securities Co., said on Tuesday before the price data were released. “The worst is still ahead for the ferrous industry.”
The steel industry in China is reaching a critical point, according to Andy Xie, an independent economist who’s been bearish on iron ore prices for years and sees a drop below $40 before year-end. Mills will have to cut production, said Xie, a former Asia-Pacific chief economist at Morgan Stanley.
Crude-steel output in China will drop 23 million tons to 783 million tons next year, according to the China Iron & Steel Association. Last month, the nation’s leading industry group reported wider losses and noted that while official interest rates in China have been cut, mills faced higher funding costs.
Iron ore may test the $40 level before year-end, Standard Chartered Plc forecasts. China’s demand may contract next year and in 2017, analyst Judy Zhu wrote in a report this month, adding that falling steel prices, deteriorating consumption and lower mills’ margins imply more output reductions.
