The post-new year funk in iron ore has continued with the steelmaking ingredient drifting lower on concerns about slowing demand in China, the world’s biggest consumer of the raw material.
After touching a five-and-a-half year low of $65.60 a tonne in December, iron ore rose sharply in the days before Christmas. However, weak demand for physical cargoes in the spot market has sent the price into retreat, falling 40 cents to $67.40 on Tuesday.
Data released overnight showed Chinese steel output grew at its slowest rate in more than three decades in 2014 because of slowing economic growth and a government clampdown on pollution.
While output reached a record 822.7m tonnes last year, it rose just 0.9 per cent, the slowest pace of growth since 1981, according to the National Bureau of Statistics.
Chinese steel production has grown at breakneck speed over the past decade, but this has led to chronic overcapacity and pollution in the key producing areas around Beijing. In an effort to improve air quality the government ordered some mills to curb production. At the same time a contraction in the property market has hit demand.
In response, many steel mills and traders have turned to the export market, although there are doubts about how much product they will be able to sell overseas. The Chinese government recently scrapped an export tax rebate on boron-added steel products and analysts are unsure whether moves to offer chrome-alloyed steels as an alternative will be successful.
Last week, the China Iron & Steel Association said the nation’s output could be approaching its peak.
On the other side of the equation there is no let-up in supply from the world’s biggest producers, who are continuing to pump more material into the market even though iron ore has halved in price over the past year.
Overnight, Rio Tinto, the world’s second biggest supplier of seaborne iron ore, said it had increased shipments of iron ore by 17 per cent last year and expected output to climb a further 10 per cent in 2015 to 330m tonnes following a big expansion of low-cost Australian operations.
“Rio is still pumping out the tonnes, and clearly ascribing to the strategy of keeping higher-cost producers off the field by playing the volume game,” said analysts at Numis Securities.
Rio and its rivals BHP and Vale are betting low prices will drive smaller rivals out of the market and help balance supply and demand. However, depreciating commodity currencies, falling oil prices and freight costs have thrown junior miners a lifeline. This was illustrated on Tuesday by Atlas Iron, Australia’s fifth biggest iron ore producer, which reported a large reduction in costs.
“As each producer lowers its costs, so it lowers the cost curve, ultimately enabling prices to fall further,” said Investec Securities.
Some analysts are more optimistic, arguing the Australian-led supply surge is entering its final stages and Chinese demand typically picks up after the lunar new year. As such, they believe there is limited downside for prices.
Source: FT
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