A SURFEIT of steel products in China's factories is set to crimp demand for Australia's iron ore exports, and analysts say it will take months to fix the problem.
Australian iron ore stocks were smashed yesterday after the price of the metal fell $US4 a tonne overnight to near three-year lows of $US90.30. In the last month alone the global price of iron ore has lost 23 per cent.
Yesterday the local market lost 1 per cent, with big falls for iron ore majors BHP Billiton and Rio Tinto, which were off 2.4 per cent and 3.8 per cent respectively.
Analysts said Chinese steel production was increasing in the first six months of this year while construction was slowing down.
"This isn't a story that's going to disappear overnight. It is going to take months and months for Chinese inventories to clear," Westpac chief currency strategist Robert Rennie said.
Official steel prices are being cut and some Chinese steel plants are closing their doors. Zinc production has been cut back significantly and coal production is dropping.
In the three months to July, China's steel production was running at record levels. It produced 182 million tonnes of steel in that time. In the first six months of the year, it produced 687 million tonnes: a record.
Brokerage UBS' long-term outlook for iron ore is $US70 to $US80, with the fall being driven by extra supply from new projects, rather than weak demand from China.
"I don't think anyone expected iron ore prices to drop as quickly as they have and that's from the demand side as we're seeing a slowing in China and opportunistic de-stocking," said UBS Perth office head Tim Day. "On the supply side, once it slides below $US120 you start to see a lot of the marginal producers dropping out."
As demand for iron ore falls, it's bad news for Australia. Last year iron ore accounted for 20 per cent of Australia's exports.
Prominent hedge fund manager Jim Chanos is betting on iron ore producers struggling as Chinese demand slows, singling out Fortescue Metals, saying it's a "value trap" and short-selling the stock, betting that it will fall. Fortescue, which argues that iron ore prices will rise again, fell 1.6 per cent yesterday.
Frequently Asked Questions about this Article…
What caused the recent iron ore price drop and China steel glut?
The article says a surfeit of steel products in China's factories — with steel production rising even as construction slows — has created a China steel glut. That led to de-stocking, official steel price cuts and falling demand for iron ore, helping push prices down.
How large was the iron ore price fall and how quickly did it happen?
Iron ore fell about US$4 a tonne overnight to near three-year lows of US$90.30, and the global price lost around 23% in the past month, according to the article.
How have Australian miners been affected by the iron ore price fall?
The local market lost about 1% on the day reported, with major iron ore miners BHP Billiton down 2.4% and Rio Tinto down 3.8%. Fortescue Metals also fell 1.6% the same day.
How long will it take for Chinese steel inventories to clear and prices to stabilise?
Westpac's chief currency strategist Robert Rennie told the article this won’t disappear overnight — it will take months and months for Chinese inventories to clear, so any recovery is likely to be gradual.
What is UBS's long-term outlook for iron ore prices?
Brokerage UBS gives a long-term iron ore outlook of US$70 to US$80 a tonne, saying the fall is being driven by extra supply from new projects rather than solely weak Chinese demand.
At what iron ore price do marginal producers start dropping out?
UBS Perth head Tim Day told the article that once iron ore prices slide below about US$120 a tonne you begin to see a lot of the marginal producers drop out.
Are any investors taking specific positions on iron ore producers?
Yes. Prominent hedge fund manager Jim Chanos is short-selling Fortescue Metals, calling it a 'value trap' and betting the stock will fall as Chinese demand slows. The article notes Fortescue has argued prices will rise again.
What other commodities and sectors are being hit by the China steel glut?
The article reports official steel prices are being cut, some Chinese steel plants are closing, zinc production has been cut back significantly and coal production is dropping. It also notes China produced a record 182 million tonnes of steel in the three months to July and 687 million tonnes in the first six months.
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