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Iron ore price hits record low

Xie’s predictions on seaborne ore borne out

The price of iron continued its downward spiral on Tuesday falling to record lows on a spot basis as all indicators point to further price declines.

Benchmark 62% Fe import price including freight and insurance at the Chinese port of Tianjin declined 1.8% to $43.40 a tonne, the lowest on record since The SteelIndex began tracking the spot price in November 2008. Traders have sold off the steelmaking raw material for two straight weeks dropping the price 9.6% just since November 11.

A flood of cheap new supply from the top producers has put pressure on prices since late 2013 leading to a drop of 47% in the price during 2014. Declines so far this year come to 39% and today’s price compare to $190 a tonne hit February 2011.

The latest weakness is being blamed on declining demand in China where steelmakers buy nearly three-quarters of the seaborne trade and forge almost as much steel as the rest of the world combined.

The China Iron and Steel Association reported this week that steel consumption in the country was down by almost 6% year on year during the January to October, a sharper than expected slowdown. That compares to a 3% slump in output so far this year after 30 years of growing production at the country’s steel mills.

According to Andy Xie, an independent economist who has been calling a steep decline in the price for years, there’s more pain ahead.

Bloomberg Business quotes Xie as saying the price will slump into the $30s before the end of the year (echoing a call by investment bank Goldman Sachs made last week) as China’s unprofitable steel industry reaches “a critical point” and start to cut production further:

“The four of them, [Vale, Rio Tinto, BHP and FMG] their production costs are all in the teens,” he said by phone on Friday. “A lot of the marginal producers, the new guys, have to exit. I expect major bankruptcies in this industry. All these guys coming out to say ‘It’s not so bad, it’s improving.’ These guys are still hanging on. They’re going to go under, you know. They’ll go bust.”

Last month the chairman of one of the largest steelmakers Shanghai Baosteel’s Xu Lejiang, said the country’s steel demand is weakening at “unprecedented speed” and forecast nationwide output may eventually slump 20%, mirroring similar developments in Europe as the US and markets matured.

Platts News reports Chinese steelmakers have become reluctant to commit to large seaborne ore cargoes and prefer to buy smaller lots of 5,000–10,000 tonnes as they are “convinced of a sustained downtrend in spot prices”:

“In the meantime, several Chinese end-users also told Platts that as the end of the year approaches, banks have been getting more proactive in chasing for payment for loans granted to steelmakers as they wanted to close their accounts.

“This has resulted in tighter credit flow among steelmakers under pressure to settle their debts and less available fresh loans being granted by the banks as well, all of which has severely limited the ability of steelmakers to buy seaborne iron ore cargoes.”