Iron Ore May Slide to Below $150 a Ton on China, Macquarie's Lennon Says

Iron ore prices for immediate delivery may fall to below $150 a metric ton in the second half from about $175 now on rising output of the raw material and concern over demand from China, according to Macquarie Group Ltd.

“In the second half, we may get more supply coming on and demand from steelmakers in China and elsewhere may stabilize or fall slightly,” said Jim Lennon, a commodities analyst at Macquarie. “In which case the upward momentum will ease.”

Vale SA and BHP Billiton Ltd., the largest and third- largest iron-ore exporters, last month switched to quarterly contracts from annual pricing deals. London-based Rio Tinto Group, the No. 2 producer, is in talks to do the same. Mining companies are seeking to capitalize on market prices for the steelmaking ingredient that more than doubled in the past year.

The drop in so-called spot prices would affect quarterly contracts negotiated between iron ore producers and steel mills by the end of the year, Lennon said in an interview yesterday at a Metal Bulletin iron ore conference in Prague.

“There’s a lagged element -- the current spot price only gets reflected in the pricing three months later,” he said. The contract price between producers and buyers for the second quarter was based on a lower average spot price, Lennon said.

“The average price on a spot basis in the previous quarter was about $120. So whatever happens we’re still talking about increases in prices in the third quarter from the second-quarter level,” he said. “Then we may start to see some stabilization and some slight fall in the fourth quarter.”

Brazilian producers are running more than 50 million tons below annual capacity, Lennon said. “There was an extreme shortage of iron ore in the first and second quarters of this year that’s why the prices went up so much,” he said.

To contact the reporter on this story: Firat Kayakiran in London at fkayakiran@bloomberg.net

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