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This analyst says iron ore prices will remain under pressure

Arif Ali / AFP / Getty Images

Iron ore spot markets have been hammered over the past month, leaving the benchmark price for 62% fines down more than 20%, according to Metal Bulletin.

The latest significant decline, the second in just six months, has accelerated in recent days, driven by a combination of weaker steel prices and concerns that steel production curbs on environmental grounds will limit iron ore demand in the period ahead.

“The rate of price contraction in iron ore and steel is worth noting,” says Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank.

“Iron ore has sunk 14.5% over the last two weeks, while spot steel rebar has decreased only 6%.”

Movements in spot rebar and iron ore markets can be seen in the chart below. It’s supplied by the Commonwealth Bank.

Source: Commonwealth Bank

With iron ore prices falling faster than those for steel, Dhar notes that margins for steel mills have actually increased in recent weeks, a scenario that has, at least in the past, acted to support iron ore demand.

However, in this instance, he says that relationship is unlikely to be maintained, pointing out the slide in iron ore prices on this occasion is due to the pending introduction of steel production curbs between November 15 to March 15 on environmental grounds.

“While [higher steel mill margins] are an important short-term price driver, it is only valid as long as China has spare steel capacity,” says Dhar.

“That condition looks under threat come November 15.

“The detailed action plan outlined in August looks to reduce utilisation rates at blast furnaces to 50% in key steel producing cities of Tangshan, Handan, Tianjin, Anyang and Shijiazhuang. There are also 12 smaller steel producing cities expected to limit utilisation rates to 70%.”

Dhar says that will likely have the impact of “squeezing spare capacity significantly in the winter which should continue to weigh on iron ore prices,” something he says should see prices average $60 a tonne in the December quarter.

However, while iron ore will likely weaken further in the months ahead, he says that higher grade ores should outperform lower grades during this period.

“High grade iron ore allows steel mills to maximise productivity and minimise costs of production,” says Dhar.

“Meanwhile lumps and even some high grade ores enable mills to bypass the sintering process. Sintering restrictions are already in force in some of the steel producing areas of China as smog has rolled in earlier than expected.”

According to Dhar, these environmental protection measures during the Chinese winter will “likely keep the premium for high grade iron ore lumps supported to some degree”.

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