Iron ore price meltdown will continue

Iron ore, the main raw material used in steelmaking, is officially in a bear market, having slid in price by more than 20% since the start of the year. Prices fell 8.3% to $104 a tonne last Monday, marking the commodity’s second-worst one-day percentage decline on record.

Prices look set to fall further. China is the key driver of demand, and economic data coming out of the country point to a slowdown amid a state-induced credit squeeze.

A sharp slide in Chinese exports took the markets by surprise on Monday. Exports fell 18.1% in February from a year earlier, reversing a 10.6% jump in January. There is also a crackdown on overcapacity in the Chinese steel sector. Banks are rationing credit to unprofitable steel mills, as Neil Hume points out in the Financial Times.

Along with efforts to curb pollution from heavy industry, and China’s long-term aim to bolster consumption at the expense of fixed investment, this is denting demand growth.

Meanwhile, supply is rising. The top four iron ore miners are jointly set to raise output by 16% this year and 11% next, notes Longview Economics. Globally, supplies will grow by 9% in 2014, and 7% in 2015, a sharp rise from around 4.5% growth in the past two years.

The global market should move into surplus this year, and the overhang will only get bigger. All told, says Goldman Sachs, prices could hit $80 in 2015.

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