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Iron ore prices enter a bear market

The spectacular six month rally in iron ore – Australia’s biggest export – is unravelling amid signs of recovery in Brazilian supply, declining profitability at steel producers and concerns about the escalating US-China trade war.

According to data from FastMarkets MB, the benchmark spot price for 62 per cent iron ore fines slumped 3 per cent to $US97.55 a tonne on Tuesday, tumbling below the $US100 a tonne level for the first time since June 6.

From the recent five-year high of $US125.77 a tonne struck on July 7, the benchmark price has now shed 22.4 per cent, leaving it in a technical ‘bear market’ defined as a drop or 20 per cent or more.

Lower and higher grade ore have also been hit hard with prices for 58 and 65 per cent fines sliding 20.4 and 19.8 per cent respectively from multi-year highs seen last month .

“Iron ore prices continue to soften as lower steel prices discouraged steel mills in China to buy the steel making ingredient,” CBA mining and energy commodities analyst Vivek Dhar said on Wednesday.

“Mills are reportedly reluctant to increase iron ore stockpiles given the weak demand backdrop.”

Mr Dhar cited the recent escalation in trade tensions between the United States and China as a factor behind the reluctance of mills’ to replenish inventory.

Daniel Hynes, senior commodity strategist at ANZ Bank, said demand-side considerations are not the only factor iron markets are currently grappling, noting seaborne supply from Brazil is also starting to return following a deadly mining accident at a facility operated by Vale in earlier this year.

“The impact is already being felt, with shipments from Brazil climbing 17% in July to 34.3 million tonnes, Mr Hynes said in a note.

Adding to supply-side considerations, Chinese iron ore port inventories continued to increase last week, lifting to 121.05 million tonnes, according to data from Steelhome. In late June, port stockpiles fell to 115.25 million tonnes, the lowest level since January 2017.

Speaking at the Diggers and Dealers mining conference in Kalgoorlie on Tuesday, Fortescue Metals Group chief executive Elizabeth Gaines said seasonal patterns in Chinese steel production may have contributed to recent price declines.

“I think there is some seasonality in it at the moment and we may find that it’s a bit slower in the second half, but certainly we will still be up year on year,” she said, referring to steel output from the world’s largest iron ore consumer.

Despite recent price falls, Ms Gaines there was still strong demand for iron ore within China.

Shares in Fortescue have fallen over 25 per cent from early July. Rio Tinto and BHP shares have fallen by 17 per cent and 14 per cent respectively over the same period.

While iron ore prices have slumped over the past month, the Commonwealth Bank doesn’t expect the selling pressure to be sustained.

“We currently see iron ore prices averaging $US110 a tonne in the September quarter before falling to $US100 a tonne in the December quarter,” Mr Dhar said in a note.

Midway through Wednesday trade, the January 2020 iron ore futures contract on the Dalian Commodities Exchange was down 4.4 per cent at 667.5 yuan a tonne, pointing to the likelihood of further near-term weakness in spot prices.
Source: Sydney Morning Herald

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