Iron ore plunges further to enter bear market

Iron ore (6) — A geologist refines an iron ore core sample before cataloguing it at an Atlas Iron Limited's prospective iron ore mine site near Port Hedland, about 1,600km (960 miles) north of Perth, May 26, 2008. Reuters/Tim Wimborne

Iron ore has made an entry into the bear market, with analysts forecasting further weakness of Australia’s largest export. As noted by Metal Bulletin, the spot price for benchmark 62 percent fines declined by another 1 percent to reach US$74.71 (AU$99.52) a tonne on Monday.

This comes on the back of a much larger 6.8 percent downslide recorded on Friday. It was the widest one-day fall in over a year. The price has come down by 21.2 percent, paving way for the export to enter the bear market, since it reached a multi-year high of US$94.86 (AU$126.36) a tonne on Feb. 21. It is now at the lowest recorded level since Nov. 30.

Slowness in Chinese steel markets has been suggested as one of the reasons for the decline by Metal Bulletin. “China’s spot rebar prices kept their downward trend on Monday owing to weak trading,” the group said. “Futures dropped below 3,000 yuan per tonne at one stage during the trading day before closing at the 3,000 yuan-mark, leading to bearish sentiment on the spot market.”

Barclays, along with Australia’s central bank and mining companies, has noted that gains are unsustainable. Chinese steel consumption may be affected by limitations imposed. It has also been suggested that increasing supplies from mines in Brazil, Australia and China could cause an undermining of prices. Chinese steel has also reportedly weakened.

“The weakness in prices was driven by a slackening in end-use steel demand," Barclays analyst Dane Davis said, speaking with Bloomberg. "When that occurred, steel producers switched to lower-quality iron ores, which were in abundance.”

A warning was issued by the Australian government concerning the steel decline in iron ore prices. "Growing supply, primarily from Australia and Brazil, is expected to steadily outpace demand growth over the rest of 2017," the Department of Industry, Innovation and Science said in its report. The department added that the prices are forecast to plunge to as low as US$55 (AU$73.26) in the final quarter.

Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, anticipated that steel demand in China will pick up this year by almost 3 percent. Nevertheless, the growth will still be lower than the increase in Chinese steel production as seen in early 2017.

A few factors – including high levels of Chinese iron ore port inventories, a 5 percent hike in seaborne supply in 2017 and the resumption of high-cost iron ore mines influenced by recent price strength – suggest to Dhar that iron ore markets will make way into surplus territory. This, he said, will continue to have an effect on prices.