Markets: Iron descent

UBS predicts a rapid slump in the iron ore price due to oversupply and a potential buyers' strike in China.

UBS is sticking to its forecast for the iron ore spot price to fall as much as 45 per cent by September 30.

The investment bank’s global commodity research analysts reckon iron ore will drop to US$71 a tonne, cost and freight in China. That’s down from US$129 a tonne yesterday, according to Bloomberg data citing iron ore imported through the northeast Chinese city of Tianjin. The Tianjin iron ore spot price has risen 13 per cent since June 26.

UBS says peak production this year in steel, particularly in China, has already passed. Demand for iron ore is slipping as iron ore supply increases, especially that produced by Rio Tinto and Fortescue Metals as new mines begin operations. Chinese steel mills, conscious that supply is outstripping demand, may go on a buyers' strike sometime in August or September in an effort to lower their raw material costs, causing the price of iron to fall to US$71 a tonne.

“Such a price will be part of a short, sharp correction that will last a few days or as long as a week,” Daniel Morgan, a UBS commodity analyst, told Markets Spectator.

“The iron ore spot market is in its infancy and does not have the liquidity of an oil or gold market. By late August or September there will be a correction."

Those who believe the iron ore price may not fall below US$100 because Chinese iron ore miners will stop their production when iron ore approaches US$100 a tonne are “flawed” in their analysis, says Morgan.

“Producers will produce rather than shut down."

On average iron ore’s spot price in the current quarter to September 30 will be US$100 a tonne, UBS forecasts. By the last quarter this year it will be back up to US$109 a tonne, on average, according to the Swiss investment bank. Longer term, UBS predicts an iron ore spot price of US$72 a tonne, free on board for 62 per cent iron content.

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