The biggest bear of all? Iron ore price heading for $50-something

Iron ore bears are out in force

Benchmark 62% iron ore fines at China’s Tianjin fell 1.2% to $148.80 on Monday – the first time the steelmaking raw ingredient has traded below the $150 level in more than a month.

The correction from 16-month highs of $158.90 set on 20 February has long been forecast, but now it seems analysts – and some producers like BHP – are attempting to outdo each other with dire predictions.

The Australia Financial Review quotes “renowned China bear” Andy Xie – economist for Rosetta Stone Advisors – as saying that investors in debt-laden Australian iron ore miners like Fortescue “risk big losses” and predicting a precipitous drop in the price of iron ore to levels last seen in 2008:

“I think it could go to 50-something . . . you need it to go low enough to convince [higher-cost] Chinese producers to abandon production.”

Shanghai-based Mr Xie, who was Morgan Stanley’s chief Asia economist, said strict controls were necessary to curb China’s overheated property sector. “So much money has been poured into the property sector,” he said.

“But the banks are rolling over the old loans so you have all these empty buildings but not many people going bankrupt.”

“I think the Chinese leaders are concerned.”

Xie’s comments echo that of the Agricultural Bank of China – one of the four big banks operating in the country with more than 320 million customers.

The government-controlled bank sounded the alarm in February about “impulsive” local governments over-investing in the name of urbanization.

Local government debt – estimated at 10 trillion yuan or roughly $1.6 trillion – “has long been considered a time bomb for [the] Chinese economy” according to the report.

Iron ore is up more than 70% since September when the commodity hit a 3-year low of $87.50 a tonne.

But sentiment in the industry seems to be souring across the board although forecasts are not quite as negative as Xie’s.

Bloomberg quotes a new Deutsche Bank report that predicts a peak in spot prices early in the second quarter before falling to $110 a tonne in the medium term and to $80 a tonne by 2018 as “an increase in steel scrap available from recycled consumer goods will curb demand for seaborne iron ore”.

Last week UBS commodity analyst Tom Price predicted iron ore to fall to $70 in the third quarter 2013 after trading around current levels through June as increased domestic supply and a ramp up in exports from Australia overwhelm demand.

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