Only a broad-based stimulus package from China can stop the iron ore price rout

Chinese iron ore imports surged by 14.9% to 86.1 million tonnes in July. The figure, up 4.3% from levels of a year earlier, was fractionally below the record-high level of 86.9 million tonnes seen in December 2014.

According to Vivek Dhar and Kofi Mensa, commodity researchers at CBA, the continued strength in import volumes – something that coincides with falling Chinese steel production and increased seaborne supply – points to a widening supply surplus developing in the second half of 2015.

While the pair believe low-cost iron ore seaborne supply from Australia and Brazil may displace some high-cost domestic supply from China, in the absence of broad-based stimulus package for China’s commodity-intensive sectors, the outlook for both prices and import growth appears weak.

“With iron ore demand, supply and production costs all likely to push iron ore prices lower in CY15, we can only identify a broad-based stimulus package for China’s commodity-intensive sectors as a catalyst to drive price support and iron ore imports. Given that China remains focused on transforming its economy towards consumption and services, we assess the likelihood of such a measure as low at this stage. In particular, the ongoing commissioning of the 26.5Mtpa Minas Rio project in Brazil and the start-up of the 55Mtpa Roy Hill project in Australia should push seaborne supply higher in 2H15”.

On Thursday the spot price for benchmark 62% iron ore fines fell 38 cents to $56.40 a tonne, according to Metal Bulletin.

While already down more than 20% in 2015 alone, some believe the spot price has significantly further to fall in the months ahead.

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