Iron Ore’s Bear Market Deepens on Demand Concern in China

Iron ore extended its decline into a bear market on concern that demand in China may slow as credit tightens in the largest buyer, exacerbating the impact of rising global supplies that are seen spurring a surplus.

Ore with 62 percent content delivered to Tianjin fell 8.3 percent to $104.70 a dry ton, the lowest since October 2012 and the biggest drop in more than four years, according to data from The Steel Index Ltd. yesterday. The benchmark price lost 27 percent since Aug. 14, when it reached a five-month high of $142.80. The raw material dropped into a bear market on March 7.

BHP Billiton Ltd. (BHP) and Rio Tinto Group predict lower prices this year after producers spent billions of dollars to expand output. Banks from Citigroup Inc. to Standard Chartered Plc predict a surplus, and Goldman Sachs Group Inc. listed iron ore among its least-preferred commodities for 2014. Credit concerns in China may have helped to amplify volatility in prices, according to Jimmy Wilson, BHP’s head of iron ore.

“You have this credit issue in China, you have reasonably high iron ore stocks, traders have a view that prices are going to go down, so they do everything they can to hold back,” Wilson said at a conference in Perth today. “That’s why these fluctuations tend to amplify.”

Stockpiles of ore at ports in China stand at 105 million tons, 21 percent higher this year, according to Shanghai Steelhome Information Technology Co. Anecdotal evidence suggests increases in stockpiles at ports, especially iron ore, are for trade-finance deals instead of production, HSBC Holdings Plc analysts Ma Xiaoping and Qu Hongbin said in a report.

First Default

Shanghai Chaori Solar Energy Science & Technology Co., a solar cell maker, became the first company to default on onshore corporate bonds in China last week. That may prompt investors to reassess credit risks, according to Bank of America Corp.

“The default by Shanghai Chaori Solar, followed by weaker-than-expected Chinese trade data, has sparked a sharp decline in iron ore and copper,” Citigroup Inc. analyst Ivan Szpakowski said in a note today. “These concerns have combined with the fundamental weakness of physical markets for both commodities due to increasing supply and weakening demand from China.”

The so-called opportunity cost of holding iron ore inventories for traders and mills in China is very high at present due to tight credit, Commonwealth Bank of Australia analystLachlan Shaw wrote in a report today.

Margin Calls

“It is believed most of the inventory purchases are unhedged,” Evan Lucas, a market strategist at IG Ltd., said in a note received today, referring to holdings in China. “This means margin calls are coming thick and fast and losses are mounting. This could see inventory-dumping as losses become unsustainable.”

Fortescue Metals Group Ltd. (FMG), Australia’s third-biggest producer, lost 1.8 percent to A$4.83 in Sydney after tumbling 9.4 percent yesterday. Rio Tinto was little changed at A$61.22, rebounding from a 5.8 percent loss, while BHP closed 0.6 percent lower at A$35.93 after a 4.1 percent loss on March 10.

While there may be further pressure on shares until iron ore bottoms out, investors should buy producers on the view that the raw material will average more than $110 a ton in 2014, UBS AG analysts led by Glyn Lawcock wrote in note dated yesterday.

“The fall in iron ore prices may reflect the beginning of a buyers’ strike in China,” wrote Shaw at Commonwealth Bank of Australia. The market is “biased to oversupply in the very near term, and may prompt a further drop in the iron ore price.”

Normal Trading

Banks in China will accept iron ore or commodities as collateral for loans under normal commercial trading, with copper usually preferred, IG’s Lucas said. China’s imports of iron ore were 61.24 million metric tons in February, from 86.83 million tons in January, according to customs data on March 8.

BHP Chief Executive Officer Andrew Mackenzie said on Feb. 18 that supply growth may drive prices lower, joining Rio Chief Executive Officer Sam Walsh, who said in December that new capacity will lower prices this year.

The global seaborne surplus may climb to 67 million tons in 2014 from 2 million tons last year, Citigroup said March 3. Standard Chartered forecasts a glut of 136 million tons from a deficit in 2013. Prices may drop to $105 this year and $80 in 2015, Goldman analyst Christian Lelong said in a Jan. 20 report.

“I do think we will see it come down and it will come back up, and steady out at whatever point the supply-and-demand curve dictates,” BHP’s Wilson said today, adding that that an outlook for prices at $80 may be too low.

Premier Li Keqiang announced an economic growth target of 7.5 percent for this year at last week’s National People’s Congress in Beijing, a pace unchanged from 2013. China accounted for about 67 about percent of global import demand in 2013, according to Morgan Stanley.

To contact the reporters on this story: Whitney McFerron in London at wmcferron1@bloomberg.net; Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net

To contact the editors responsible for this story: John Deane at jdeane3@bloomberg.net Jake Lloyd-Smith, Jarrett Banks

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