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Markets
Iron-Ore Prices Hit Low as China Demand Remains Weak
From the Wall Street Journal of Tue, 23 Dec 2014 23:12:55 EST
A water truck sprays water onto a mine pit at a facility under construction in Western Australia's Pilbara region. Iron-ore prices are at a five-year low as Chinese demand remains weak.
A water truck sprays water onto a mine pit at a facility under construction in Western Australia's Pilbara region. Iron-ore prices are at a five-year low as Chinese demand remains weak. Bloomberg News

SYDNEY—Iron-ore prices sagged to a fresh 5½-year low on Tuesday as demand from China, the world’s No. 1 buyer, remained weak and supplies ample.

Analysts said many traders were waiting on the sidelines for clarity on the outlook for demand—and consequently prices—as Chinese steel production eases during winter in the northern-hemisphere.

The value of the steelmaking commodity slumped by 3.5% on Tuesday to US$65.60 a metric ton, according to The Steel Index, a data provider. That is the lowest price since June 2009, and 51% below where it stood at the beginning of the year. “Prices are bouncing around at a low level, but they could dig lower,” said Justin Smirk, a Sydney-based economist at Westpac Banking Corp. “It is a market that is uncertain and adequately supplied.”

Chinese steel production, which he says already appears to be easing, tends to moderate in the colder winter months of January and February. Steelmakers reduce output as construction activity across the northern provinces grinds to a halt, stifling steel sales. Mr. Smirk said traders and buyers appeared to be waiting to see what sort of “size adjustment” there would be to demand in the early part of 2015.

The decline in prices is squeezing producers, prompting mining companies to cut jobs and drive down costs in other ways. Midsize Australian miner Atlas Iron Ltd. said on Tuesday that it expected to record an up-to 900 million Australian dollars (US$729 million) write-down against its Pilbara mining operations in the first half of next year following the marked drop in prices.

A sharp increase in mine supply—mainly from Australia, which accounts for around half of all iron ore traded by sea—has underpinned this year’s market slump.

Some of the world’s largest producers, such as Rio Tinto PLC and BHP Billiton Ltd. , ramped up production to record rates after investing billions of dollars in expanding their operations in northwest-Australia’s iron-rich Pilbara region. “The long-awaited oversupply in iron ore arrived with a bang in 2014,” and has put it on track to be the worst-performing commodity of the year, Barclays analysts said in a recent note.

Still, stockpiles of imported ore sitting at Chinese ports have been declining, which shows there is still some demand for the raw material. In the week to Dec. 19, port stocks fell 2% to 102.8 million tons. “Port inventories are a good indicator of demand,” said Westpac’s Mr. Smirk, adding that declines in port stocks traditionally help to arrest a tumbling iron-ore price.

Prices should find a floor as more mines struggle to break even at current prices, said the Barclays analysts, who forecast prices wouldn’t drop below US$65 a ton for some time. “That said, given a further two years of supply additions [expected from major producers] well in excess of demand, we see few reasons to be structurally bullish on iron ore for the next 12-24 months,” they said.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com



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