Iron ore prices approaching 5-year low

Iron ore prices hit lowest in five years

Prices for iron ore tumbled again Friday for the 10th day in a row, hitting levels close to those seen last in October 2009.

The decline is the longest run of daily losses in two years and oversupply as well as China’s unseen signs of recovery are to blame.

Benchmark Australian ore, with a 62% iron content, dropped 0.1% to $87.62 a tonne, according to Metal Bulletin, bringing the monthly loss to 8.4% and the yearly one to over 35%.

Figures provided by The Steel Index, however, contradict the above numbers. Spot price for the import of iron ore into China was, according to TSI, up 0.7% to $87.9 a tonne on Friday.

The extent of the recent falls is now starting to have a serious impact on the share prices of the sector heavyweights, with Rio Tinto’s (NYSE:RIO) stock sinking again Friday to $53.57 at 11:35 am in New York, totalling a 5% decline for the week. Vale (NYSE:VALE) was down 0.61% Friday to $13.03, yielding almost 5.3% this week, and BHP (ASX:BHP) lost 1.45% in Sydney, closing at $36.67.

The steel-making raw material is vital to the profitability of many of these miners. They are spending billions of dollars ramping up output to meet anticipated future demand, and capture market share, while pushing the global market into surplus.

Barclays Bank estimates that, assuming Chinese steel production grows at 5.1% per year, there will be a surplus of 79 million tonnes of seaborne iron ore this year and 67 million tonnes next year. UBS estimates a surplus of 74 million tonnes this year, with a possible oversupply of 267 million tonnes by 2016.

Volatility here to stay

Iron ore consultant Philip Kirchlechner told ABC News that while analysts believe prices will return to at least $95 a tonne towards the end of the year, volatility will continue.

"Two years from now, Brazil will put … a big new mine into production. So in two years, you'll see again a pretty lumpy increase in output that will cause another slump [in] prices," he was quoted as saying.

"So, this volatility will continue as supply tries to catch up with demand and then overshoots again, but in the short term I think prices will be pretty stable, around the $90 mark."

The price slump, experts agree, could start to force high-cost Chinese miners out of the market.

Iron ore prices hit lowest in five years

Source: The Steel Index.