Markets: Westpac picks an iron plunge

Westpac's Huw McKay predicts falling Chinese demand will push the iron ore spot price down 40 per cent in the short term.

Westpac’s senior international economist Huw McKay says he’s not a China sceptic, but he’s not a bull in the short term, either – if you ask him about the iron ore price, at least.

By September 30, McKay predicts the spot iron ore price will fall 40 per cent from its current level to $US85 a tonne. The Tianjin spot iron ore price was yesterday at $US141.20, having climbed 28 per cent since May 30.

McKay believes the Chinese economy is slowing and forecasts economic growth to be 7.4 per cent this year, less than the official Chinese target of 7.5 per cent.

Between 1978 and 2011 China’s GDP growth averaged 10 per cent. Now, says McKay, heavy industry – in particular steel making, ship building and tool making – needs less raw material as production slows amid monetary policy tightening by the Chinese authorities, which is dampening property development and demand for steel and ultimately iron ore.

Iron ore inventories at Chinese ports are falling, McKay told Markets Spectator. His research, in conjunction with Australia’s Bureau of Energy Resources and Energy Economics, shows that in the three months to September 30 China has demanded less iron ore than historically, and this has affected prices.

Last year the Tianjin iron ore price fell as low as $US86.90 a tonne on September 4. McKay expects this to be repeated.

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