20-04-2017

Iron ore price slump raises spectre of new downturn

iron

Mining stocks have fallen on the back of a slump in the price of iron ore, the metal used to make steel.

Iron ore prices have slumped 30pc since February, to around $63 a tonne, their lowest level since November – raising fears that the market could be set for another downturn.

In 2015, prices touched an eight-year low of $38 a tonne, before retracing throughout 2016 to hit a high of $95 in February this year.

London shares in BHP Billiton and Rio Tinto, two of the world’s largest producers of iron ore, slipped 3.4pc and 2.8pc respectively.

Global oversupply has been blamed for the latest move in prices, while a slowdown in the Chinese car sector has hit steel prices in the country. This has resulted in steel mills opting to buy cheaper iron ore that is stockpiled in ports, rather than the higher-grade, seaborne metal supplied by the likes of BHP and Rio.

“That swing in demand growth is hugely damaging,” said Ben Davis, analyst at Liberum. “Iron ore prices have got a lot further to fall. They’re easily going to the $40s.”

China consumes around 50pc of iron ore worldwide, with much of it going to feed its construction industry. The Chinese housing market remains strong, according to Liberum, but a crackdown on cheap credit and mortgage lending could put a lid on house price rises, with a knock-on impact on construction.

In a note last week, David Pleming, of HSBC, said he expected a “massive fall” in the iron ore price this year. “Strong supply recovery and growth [will drive] a widening surplus in the iron ore market,” he said, adding that steel demand in China could “soften” in the third quarter of the year.

UBS’ Myles Allsop added: “We see headwinds from falling spot iron ore prices and slowing China momentum after 12 months of generally better-than-expected economic data.”

Yesterday China reported that its economy grew by 6.9pc in the first quarter of the year, from 6.8pc in the previous three months.

Some of the weakness in the iron ore market is due to seasonal shifts, with the first two months of the year typically supporting strong prices as steel mills restock their raw materials.

Paul Gait, analyst at Bernstein, said the recent fall highlighted the “profound sensitivity” of commodity markets to slight shifts in supply and demand.

“It’s always distressing when we see price collapses like this, but you should be wary of the surge of euphoria on the way up, and the surge of despair on the way down,” he said, arguing that iron ore will self-correct to a level somewhere between the extreme highs and lows seen during the last two years.

Since the downturn of 2014-15, the large mining companies have slashed costs and paid off debt in order to withstand fluctuations in prices. Most analysts now believe balance sheets across the sector are much stronger than they were.

“There’s no cause for panic as far as an investor in Rio Tinto is concerned,” Mr Gait added.

Source: The Telegrah

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