Iron Ore Drops Into Bear Market on China Growth Concern, Supply

Iron ore slumped into a bear market on concern that slowing economic growth in China, the world’s biggest buyer of the steel-making raw material, will hurt the outlook for demand as global supplies increase.

Ore with 62 percent iron content delivered to the Chinese port of Tianjin fell 1.3 percent to $126.40 a ton yesterday, according to The Steel Index Ltd. The benchmark price has lost 20 percent since Feb. 20, when it reached a 16-month high of $158.90, meeting the common definition of a bear market.

Iron ore joins copper, tin, lead and gold in bear-market territory as commodities have declined in 2013. China’s April industrial output trailed estimates and fixed-asset investment slowed, data showed this week, after economic growth slowed in the first quarter. Bank of America Corp. cut its estimate for 2013 gross domestic product growth to 7.6 percent from 8 percent.

“It’s in response to recent weakness in Chinese data,” Natalie Rampono, a commodity strategist at Australia & New Zealand Banking Group Ltd. (ANZ) in Melbourne, said today. “The market is bearish in terms of demand.”

Prices will fall as supplies expand faster than demand over the long term, Alan Chirgwin, general manager of iron ore marketing at BHP Billion Ltd. (BHP), said May 8. Low-cost supplies mainly from Australia and Brazil will replace more expensive output, he said.

Rio’s Expansion

Rio Tinto Group (RIO)’s planned expansion in Australia’s Pilbara to 290 million metric tons a year is expected to be completed in the third quarter, the second-biggest mining company said in February. The board is expected to approve in the fourth quarter an increase to 360 million tons unless there are significant changes to the global demand-supply situation, Chief Executive Officer Sam Walsh said last week, according to two people present at a meeting with investors and analysts.

The increase in global supply may take longer than expected, while demand in China may be sustained into 2014, Morgan Stanley said in a May 14 report. The bank said in April that the global seaborne market will shift into surplus from 2015, revising a January forecast of supplies to outpace demand in 2014.

“Concerns over the sustainability of strong iron ore prices are focused on the prospect of an excess of supply coming to market in 2013 and 2014,” analysts Joel Crane and Peter Richardson wrote in the report, referring to expansions such as the Pilbara operations. “While an increase in mine capacity is well understood in the market, the timetable of ramp-up into that capacity is not.”

Structural Decline

Iron ore prices will go into so-called structural decline in the long term as the market moves into oversupply in 2014-2015, Goldman Sachs Group Inc. said in a May 14 report, forecasting an average price of $115 a ton in 2014.

“Chinese macro data has been worse than expected,” Daniel Hynes, Sydney-based head of commodity strategy at CIMB Group Holdings Bhd. (CIMB), said yesterday. Rio’s planned expansion in Australia “brings focus back on the supply side which, from an Australian point of view, is growing strongly,” he said.

Speculation of further credit tightening in China’s housing market may also be weighing on prices, Hynes said. Homes sales in China fell 13 percent in April from the previous month after measures ordered by the government this year, including higher down-payment requirements and strict enforcement of transaction taxes, began to take effect.

Limited Room

Chinese Premier Li Keqiang signaled that there is limited room for using stimulus and direct government investments to achieve China’s development targets for this year. China’s current economic development situation faces “relatively large” downward pressure, he said, according to the transcript of a May 13 speech on the government’s website.

Last year, China cut interest rates twice and accelerated investment approvals in response to slowing growth. China’s first-quarter railway infrastructure investment gained 28 percent to 54.51 billion yuan ($8.9 billion), Xinhua reported April 11. The country will invest 520 billion yuan in railway infrastructure this year, it said.

Iron ore is measured in dry tons, or metric tons less moisture. At Tianjin port moisture can account for 8 percent to 10 percent of the ore’s weight.

To contact the reporter for this story: Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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