Iron Ore in Worst Run Since '08 as China's Steel Output May Drop

  • Prices fell 46% this year on rising supply, China slowdown
  • China scheduled to report steel output data on Saturday

Iron ore extended declines for a ninth week, the longest losing streak in seven years, with Chinese steel production data on Saturday expected to signal a further weakening in demand.

Ore with 62 percent content delivered to Qingdao dropped 4.3 percent this week, falling to $38.30 a dry metric ton on Friday, a record low in daily prices compiled by Metal Bulletin Ltd. going back to May 2009. The commodity capped its worst stretch of decreases since October 2008 as low-cost supplies expand, according to Metal Bulletin’s weekly data.

Iron ore has plunged 46 percent this year on surging output from the biggest miners including Vale SA in Brazil and BHP Billiton Ltd. and Rio Tinto Group in Australia. At the same time, China’s on track for the weakest growth since 1990 as the government steers the economy away from heavy industry, hurting demand for steel, cement and coal. Saturday’s industrial production figures will probably show further cuts in steel output, says Founder Cifco Futures Co.

“Steel production probably fell because weak seasonal demand is compounding the mills’ tough financial position, so an increase is unlikely,” Wang Yongliang, an analyst at Founder Cifco in Tianjin, said by phone. “No doubt that will reduce demand for iron ore. Where ore prices go from here will also depend on supply from the Big Four.”

Demand Falters

Steel demand in China is dropping for the first time in a generation. The country’s steel industry purchasing manager’s index fell to 37 in November from 42.2 a month earlier, with readings below 50 indicating contraction. Port holdings jumped 2.1 percent to 89.5 million tons last week, according to Shanghai Steelhome Information Technology Co.

Ore’s tumble into the $30s threatens the world’s largest miners as prices approach break-even costs at their most expensive operations, according to Capital Economics Ltd. John Kovacs, Capital’s senior commodities economist in London, estimates break-even levels at $28 to $39, taking into account freight and other costs.

Vale, Rio and BHP have defended their strategy. Andrew Harding, Rio’s chief executive for iron ore and Australia, said in November that if the company moved to cut production, volumes would be taken by less efficient rivals. Luciano Siani, Vale’s chief financial officer, said last week the company will continue to lower break-even costs so it can deliver cash flows no matter where prices may be.

More Severe

The commodities rout has been more dramatic than anticipated, BHP Chief Executive Officer Andrew Mackenzie told the Australian Broadcasting Corp. in a radio interview. While low prices pose short-term challenges for the company, they’ll boost economic growth globally and stimulate demand, Mackenzie said in a broadcast on Friday.

Perth-based BC Iron Ltd. said Friday it’s suspending some operations at its Nullagine venture with Fortescue Metals Group Ltd. Even after reducing costs, ore’s continued decline, especially over the past two weeks, has resulted in a price and outlook which wouldn’t be in shareholders’ best interests if Nullagine kept operating, it said in a statement.

There’s still more seaborne supply coming. Billionaire Gina Rinehart’s Roy Hill mine in Australia began shipments on Thursday with the maiden cargo bound for Posco’s steel mills in South Korea. The producer has said almost 90 percent of the project’s output, targeted to reach 55 million tons a year, is under long-term contract and won’t directly pressure prices.

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