Iron Ore now In Bear Market grip

The slump was triggered by worries that slowing economic growth in China,the world’s biggest buyer,would reduce demand while global supplies rise

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

China’s April industrial output trailed estimates and fixed-asset investment slowed, data showed this week, after economic growth unexpectedly contracted in the first quarter. Bank of America Corp. reduced its estimate on China’s 2013 gross domestic product growth to 7.6% from eight percent.

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

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

Expansion Plans

Rio Tinto’s planned expansion in Australia’s Pilbara to 290 million metric tonnes a year is expected to be completed in the third quarter, the world’s second-biggest mining company said in February. The board is expected to approve in the fourth quarter an increase in annual output to 360 million tons unless there are significant changes to the global demand-supply situation, Chief Executive Officer Sam Walsh said recently, 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, said Morgan Stanley in a report dated yesterday. The bank said in April that the global sea borne market will shift into surplus from 2015, revising a January forecast of supplies outpacing demand in 2014.

“Market 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.”

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

China Stimulus

Speculation of continued credit tightening in China’s housing market may also be weighing on prices, according to Hynes. Homes sales in China fell 13% 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.

Chinese Premier Li Keqiang signaled 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 is complicated and 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. Iron ore is measured in dry tons, or metric tons less moisture. At Tianjin port moisture can account for 8% to 10% of the ore’s weight.

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