Mini iron ore rally melts away

A mini rally in iron ore prices on hopes Chinese economic stimulus would boost demand has come to an abrupt end.

Iron ore, a key ingredient used in steelmaking, is down 4% over two days, trading at $96.10 a tonne on Thursday from a brief period in triple digits. Benchmark 62% iron ore fines at China's Tianjin hit a three-and-a-half year low of $86.70 last week – this time last year the commodity was still worth $177 a tonne.

Chinese mills have been producing steel at a record pace of almost 2 million tonnes per day – nearly more than the rest of the world combined – despite the slump in demand.

José Carlos Martins, director of ferrous metals and strategy for the world's number one iron ore producer Vale, told Reuters Brazil yesterday that he predicts the iron ore market will remain stuck in a period of significant volatility until China reduces its inventory of the metal.

The country’s steelmakers cut inventories at ports and mills by some 13%  during August but it still sits at historically high levels of 111.8 million tonnes according to investment bank Macquarie.

According to data released by China's National Bureau of Statistics, production was 58.7 million tonnes in August, down only 1.7% compared to last year. At the same time the country's miners upped iron ore output – albeit of lower quality – by more than 10% to 116 million tonnes, further pushing down import prices.

The annual seaborne iron ore trade is roughly 1 billion tonnes and close to 60% of the commodity ends up at Chinese ports.

According to the state-backed China Iron and Steel Association (CISA) the country's steelmakers are flooding export markets – sometimes selling steel products at a loss – just to keep cash flows going.

The world's number one money manager Pimco last month released a bearish report on the Chinese steel industry saying Chinese steel demand has peaked and that iron ore prices may falter as new supply ramps up by 2014 and Chinese steel demand weakens.

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