Iron Ore Seen Poised for Bear Market by Smirk on Supplies

Iron ore may fall 35 percent by the year-end after advancing to $170 a metric ton in the first half as mines in China boost production, cutting import demand in the world’s largest buyer, according to Westpac Banking Corp.

The price of the steelmaking raw material may tumble to $110 a ton by the end of 2013, according to Sydney-based senior economist Justin Smirk. Ore with 62 percent content delivered to Tianjin was unchanged at $154.20 a dry ton today, according to data from The Steel Index Ltd. Smirk is the most accurate base-metals forecaster tracked by Bloomberg in the past three quarters and correctly predicted a price slump last year.

Iron ore has surged from a three-year low in September as China’s growth rebounded in the final quarter and imports rose to a record. Bank of America Corp. said last month the commodity may fall to $110 a ton by the year-end, while Deutsche Bank AG and JPMorgan Chase & Co. also predict a second-half slump as worldwide supply increases. Some investors deem a drop of 20 percent or more to be a bear market.

“Given the low level of inventories and where prices are going, we think Chinese production will respond,” Smirk said in an interview today. “The big swing will come through from China itself,” he said, referring to iron ore production.

Reduced Stockpiles

Inventories at Chinese ports dropped 5.2 percent this year to 66.9 million tons, the lowest since January 2010, according to data from Beijing Antaike Information Development Co. Global seaborne demand will increase 8.3 percent this year, with China boosting purchases 12 percent, Morgan Stanley estimates. The country is the world’s largest steelmaker.

Chinese mine supply may increase from March after production was curbed by the coldest winter snap in almost 30 years, Credit Suisse AG said Jan. 10. Steelmakers in China are using more domestic ore after the rally in the price of imports, researcher said in a report last month.

China’s ore demand may total 677 million tons this year based on 62 percent iron content, according to Morgan Stanley, which estimates that local mines will supply the equivalent of 260 million tons. Australia and Brazil are the largest shippers.

Through to the end of the year, iron ore “will start falling away as global supply comes along, Chinese supply recovers and inventories have been built up,” said Smirk.

Swap Prices

Swaps from GFI Group Inc. show that prices are expected to decline over the year. The swap for this month was at $155 a ton at 12:39 p.m. in London after losing 50 cents, with June at $140.50, September at $133.50 and December at $128.

The ore rally will end as steel demand slows, according to Fitch Ratings CIS Ltd. Producers can’t afford to absorb higher raw-materials costs or pass them on to customers, analysts including Alexei Fadyushin said in a report today. European output will drop on weak demand for construction and cars, while Chinese steel demand growth has peaked and output gains will trail 5 percent a year, the credit-rating company estimates.

Manufacturing in the second-largest economy sustained an expansion last month, according to data from the National Bureau of Statistics and China Federation of Logistics and Purchasing, as well as HSBC Holdings Plc and Markit Economics.

New-house prices climbed 1 percent in January, the most in two years, SouFun Holdings Ltd., the country’s biggest real estate website owner, said Feb. 1. Steel is used in construction, infrastructure, autos and appliances.

India’s Karnataka state will resume output from seven iron-ore mines after a ban on mining was lifted. Initial supplies from the mines will start in the next two weeks, H.R. Srinivasa, the state’s mining director, said yesterday. Indian shipments last year totaled 47 million tons, according to Morgan Stanley.

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

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