Iron Ore on the Cusp of $30s as BHP, Rio Shares Extend Slump

  • `The outlook remains grim for iron ore fines,' BMO's Fung says
  • Rinehart's Roy Hill project to ship first cargo next week

Iron ore is on the cusp of dropping into the $30s a metric ton as the biggest producers expand supply and the onset of winter in China dulls demand that’s been hurt by the slowdown in growth in the world’s top user. Miners’ shares retreated.

“The outlook remains grim for iron ore fines because end-demand from construction and manufacturing is uncertain,” said Jessica Fung, an analyst at BMO Capital Markets in Toronto. “Steel inventories have been building.”

Spot ore with 62 percent content delivered to Qingdao fell 0.9 percent to $40.75 a dry ton on Thursday, a record low in daily prices compiled by Metal Bulletin Ltd. dating back to 2009. It’s dropped each day this week, losing 8.4 percent.

The raw material traded as low as $10.51 in 1988, when annual benchmark contracts were negotiated between the largest miners and steel producers, according to data from the International Monetary Fund.

The commodity sank this year as the slowdown in China hurt demand while the top suppliers including BHP Billiton Ltd. and Rio Tinto Group in Australia and Brazil’s Vale SA boosted low-cost output. More seaborne supply is due to commence next week as billionaire Gina Rinehart’s Roy Hill mine ships its inaugural cargo from Australia’s Port Hedland. China’s steel industry shrank further last month, official data showed.

‘Downward Pressure’

“The expectation for Roy Hill’s start up has been discussed in the market for a few years now but it hasn’t impacted the physical market yet,” Fung said by e-mail. “I think we will see further downward pressure on spot prices when exports begin.”

Roy Hill Holdings Pty has said almost 90 percent of the output from the project, which aims for annual production of 55 million tons, is under long-term contract, meaning it won’t directly pressure prices. The company said on Thursday the first shipment will be delayed to next week, citing operational and safety constraints required by the port authority. 

“Roy Hill is indeed about to ship its first cargo,” said Melinda Moore, a commodity strategist at ICBC Standard Bank Plc in London. “The recent bearish physical market conditions are not linked to the entry of these tons. The physical market will not be impacted until the tons actually begin to appear.”

Seasonal Drop

Demand is falling on seasonal as well as structural declines, while supply is still expanding, according to Moore. Most recent price weakness is being caused by the typical seasonal winter destocking due to poor construction conditions, she said by e-mail.

Most-active futures on the Singapore Exchange this week traded below $40 for the first time, and losses on that contract can presage a drop in the benchmark price for spot ore in Qingdao.

Andy Xie, an independent economist, and RCMA Asset Management Pte’s Michael Coleman have predicted a drop below $40 before year-end on resilient supply and faltering Chinese demand. 

China’s steel industry PMI slumped to 37 in November from 42.2 a month earlier, according to official data on Tuesday. Readings below 50 indicate contraction. The country makes more than half of the world’s steel.

BHP dropped 3 percent to close at A$18.19 in Sydney, taking losses this year to 34 percent, and retreated 2.4 percent in London. Rio fell 1.9 percent in London and Fortescue Metals Group Ltd. lost 2.3 percent in Sydney. The trio are Australia’s largest shippers.

An estimated 85 percent of mills in China are making losses after steel prices fell, Macquarie Group Ltd. said in a report received on Thursday that summarized findings from a recent visit. “Everything we heard in China on this trip points to weak demand,” the analysts wrote.

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