THE market's summer romance with iron ore seems to have soured, as deflation in the benchmark price over recent days dragged down stocks and ended a month-long rally for Australia's most lucrative export.
December's 38 per cent rise in the iron ore price has begun to reverse over the past week. The retreat accelerated on Thursday when the price fell 5 per cent in a day.
That fall to $US145.40 ($138) a tonne was reportedly the commodity's biggest single-day fall in more than a year.
Fortescue Metals wore the brunt of investor angst, closing 19¢ lower at $4.38, while its Pilbara neighbour Rio Tinto fell 95¢ to close at $64.60.
Atlas Iron fell 6¢ to $1.55 and BC Iron fell 10¢ to $3.40, while Arrium fell 2¢ to close at 92¢.
All those stocks are now between 7 and 20 per cent lower than they were a fortnight ago. But investors can take comfort from the fact that all are higher than they were in September, when the price fell to $US86 a tonne.
BHP Billiton, the iron ore exporter with the most diversification to buffer its exposure was the exception, with shares rising 9¢ to $36.34.
A UBS analyst, Daniel Morgan, said the iron ore produced by Chinese domestic suppliers had not risen in price as much as iron ore from exporting nations such as Australia over recent months, and the softening over the past week was probably a sign that the gap had become big enough to lure customers to buy from Chinese domestic suppliers for a while.
"We think the price ran ahead a bit too hard, and we had expected it to come back," he said.
Mr Morgan said it was common to see customers stock up through December ahead of the northern winter and Australia's cyclone season. He said investors should not get too swayed by daily fluctuations in the price, given it represents only a small number of transactions each day.
"It's not a large amount of boats [arriving into China] on a daily basis that price the trade, and individual trades up or down can move it a bit, and that's what we've seen recently," he said. "Looking back over recent weeks, the price has been characterised by big jumps, so you've seen the iron ore price move up by a few bucks a day, and [Thursday's] move is a reversal of that. Daily moves can be volatile, so we look at trends."
Only small amounts of iron ore are sold at the spot price, but the monthly or quarterly average of the spot price typically helps to set the prices at which the likes of Rio and Fortescue sell ore. UBS is forecasting the benchmark iron ore price to average $US131 a tonne in the first quarter of the year and improve to $US133 in the second quarter.
However, UBS expects the price to soften to $US123 a tonne and $US118 a tonne in the third and fourth quarters.