Iron ore is just going down. Photo: Louie Douvis
Iron ore sank to the lowest level in at least six years amid speculation that mills in China are cutting back steel output, hurting demand for the raw material while supplies from the biggest miners expand.
Ore with 62 per cent iron content delivered to Qingdao fell 1.9 per cent to $US43.89 a dry metric ton overnight, the lowest in daily data dating back to May 2009, according to Metal Bulletin, eclipsing the previous low of $US44.59 set in July.
So why is iron ore sinking and what will the floor be?
1. US RATE RISES
One of the biggest factors weighing on commodities is the US Federal Reserve's interest rate decision in December. The belief the Fed will raise rates has boosted the value of the US dollar, in which all commodities are generally priced.
In other words, the current commodities sell-off is the result of commodities traders pricing-in the US rate rise. Although most commodity and currency traders believe US rates will rise in December, some are still unconvinced. There may still be some pricing-in left to do, which will result in the iron ore price sinking further. 2. CHINESE GROWTH
China is the world's largest importer of iron ore due to the fact that it is the world's largest steel producing country. Any signs of slowing of slowing Chinese growth will directly impact commodity prices.
The Chinese property sector, in particular, is a key driver of steel and iron ore demand. UBS commodities analyst Daniel Morgan has cited property construction normalisation as the second major factor driving the iron ore price, behind US rate rises. Unfortunately, the time of normalisation is being pushed further and further back, he said. 3. CHINESE ECONOMIC CYCLE
Chinese rates of steel production are not uniform throughout the year. Generally, Chinese steel mills buy a lot of iron ore in December to stockpile for the first-quarter production season. Iron ore demand is high in the last quarter of the year, therefore, before dropping in the first quarter of the year.
What this means is that weak though iron ore is now, it will be even weaker in the first quarter of 2015.
ANZ commodity analyst Mark Pervan, who has cited the cycle in Chinese steel production as a key dynamic, said the prices would only begin to recover in the second quarter of 2016. 4. ROY HILL
Gina Rinehart's new mine at Roy Hill will, within a year, be producing 50 million tonnes of iron ore. That is less than 5 per cent of the total iron ore market, but "enough to be meaningful," according to Mr Morgan.
That is also the view of Macquarie bank. In a recent paper, "Iron Ore Trade in Stagnation Mode", the bank cited Roy Hill as "the 2016 challenge for iron ore". "In our view the second quarter of 2016 will be the test case here as to how much smarter BHP, Rio and Vale have become around managing supply to the market to underpin prices. ANY POSSIBLE BULLISH INFLUENCES?
1. BHP'S SAMARCO DISASTER
"We still don't know what the influence of Samarco might be," said Mr Morgan last week. "It's a left-field thing that wasn't factored in that might offset some of the bearishness." 2. CLOSING OF SMALL PRODUCERS
Small iron producers are exiting the market and will continue to do so. The supply cuts from that, and the resultant market power gained by the big producers, could see iron ore prices surge back above $US50 per tonne. 3. UNEXPECTEDLY GOOD GLOBAL GROWTH
If US, Chinese and global growth unexpectedly picks up, iron ore demand may follow and put a solid floor underneath the price.
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