More pain to come.
The price of iron ore has declined about 10 per cent over the past five sessions to trade at near $69 a tonne, the lowest it has been in two months, and analysts expect further pressure over the next quarter.
The price drop appears to be starting to pinch for major producers. Fortescue Metals was down 3 per cent on Thursday to A$5.170, continuing a slide from around A$6.070 at the end of August. Rio Tinto, another major Australian producer, was down about 0.9 per cent to A$65.50, its lowest point since late August. BHP Billiton was likewise down about 0.8 per cent to A$25.990, its lowest point in about four weeks.
Earlier in the week, Australia’s central bank helped to fuel negative sentiment in the market when it said it was expecting a short-term drop in the price, as Chinese steel demand hits a ceiling and global supply continues to expand.
Glyn Lawcock, UBS Equities managing director, global head of mining, told the Financial Times:
The recent price drop is interesting because we are seeing steel prices rise in China but iron ore price fall. I would say, the traders are thinking that cuts in steel production to ease pollution in China will see steel markets tight, thus steel price rising, while reduced steel production will conversely see demand for iron ore down, thus iron ore price declining.
Mr Lawcock adds that UBS has viewed the iron ore price above $70 a tonne “as trading above fundamentals and unsustainable”.
He said the price was driven up by traders on the Dalian futures market in China, but that activity in China this quarter had been better than expected, meaning that the price of around $72 a tonne beat the UBS forecast of $65 a tonne. However, UBS still expects the price to fall to an average of $60 a tonne in the fourth quarter.
Ming He, senior manager, Asia Pacific metals and mining at Wood Mackenzie in Beijing, says the price dip over the past week mainly reflects a looming drop in demand – which is coming “as a result of hot metal production restriction through the winter heating season” in northern China.
China will implement strict seasonal air pollution control measures in the regions near Beijing (so-called 2+26 cities), during the heating season in the winter. According to this policy, steel mills in Tangshan, Shijiazhuang, Handan and Anyang [among others] will only allow running their blast furnace at 50 per cent or less utilisation rate from November 15, 2017, to March 15, 2018. This means there would be less iron ore required if we assume that the production loss cannot completely be caught up by steel companies in other regions.
He also flags falling steel demand as construction for infrastructure and property declines regions such as Tianjin and Hebei.
Wood Mackenzie similarly forecast a further drop in the iron price, but, if environmental pressure in China persists, the firm expects steel companies will “fly to high quality”.
ANZ analysts Daniel Been and Giulia Specchia said that on a technical basis, iron ore remains vulnerable to further near-term falls and the peak in Chinese demand for steel will continue to keep prices under pressure.
Our commodity strategist is not bearish on the medium-term outlook and expects iron ore prices to stabilise around the mid-sixties over the medium-term.
They also noted that the correlation between the Australian dollar and the price of iron remains “well below its historic average”, but they are not expecting a big impact on currency even if that gap narrowed.
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