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Analyst predicts steeper decline for iron ore prices

iron ore

Lower steel margins and strict production controls in China are driving down iron ore prices, according to a report by CRU Insight.

The price of 62 per cent ore fines imported to China’s Qingdao port was trading at $US147.65 ($202.95) per dry metric tonne on Wednesday, a slight improvement after last week’s significant falls.

Yet it remains a far cry from the record high of more than $US230 per dry metric tonne recorded in May.

CRU Insight principal analyst Erik Hedborg and senior analyst Richard Lu, discussing iron ore prices in a new report, said Chinese demand for spot volumes has led to sharper than expected declines.

The report found that China, which accounts for around 75 per cent of seaborne demand, has reported lower steel margins and reduced steel output.

“Steel margins have declined, especially for longs producers that are struggling with weak demand from China’s construction sector,” the report stated.

“Many steelmakers, especially smaller ones, are now losing money on every tonne of steel they are producing.”

Chinese steel makers have been told to reduce output after a record 290 million tonnes produced in the second quarter of 2021, which has caused an oversupply of iron ore at steel mills.

“Many steelmakers produced a lot of steel in (the first half of 2021) have been told to reduce output quite significantly in (the second half of 2021,” the report stated.

“Many of these steelmakers, together with traders, are now sitting on excess volumes of iron ore and have started selling volumes to smaller steelmakers that have no access to seaborne volumes.”

CRU is anticipating further declines in iron ore prices towards the end of 2021, however Chinese demand is expected to stabilise.

Australian iron ore producers such as Rio Tinto have also faced supply issues, resulting in lower shipments compared to the previous year.

However, CRU doesn’t expects prices to drop to the $US60-per-dry-metric-tonne low that was witnessed during 2015 and 2016.

“Are we likely to see the iron ore price fall that low? Certainly not,” CRU stated. “Although falling, Chinese steel production is still at high levels while iron ore supply is still far away from the highs observed in 2018, right before the Vale accident.”

There may be hope for iron ore with further potential stimulus construction activity in China, as September to October is the country’s peak construction period.

“By looking at the total market balance, we find it unlikely that prices will fall below $US100 per dry metric tonne in the coming months,” CRU stated.

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