Iron Ore Prices Retreat On Concerns China’s Steel Capacity Cuts Will Hit Demand

27 August 2016

Iron ore prices have retreated on the concerns that China’s expected ramp up of steel capacity cuts in the remainder of the year will zap iron ore demand.

Iron ore lost 0.7% overnight to touch $61.10. China is aiming to reduce steel capacity over the medium term as its producers remain unprofitable. While prices have edged lower at the end of the week, iron ore has had a blockbuster year; prices have climbed about 40% this year.

With high inventories at Chinese ports, falling iron ore demand and rising supply there are concerns over how long this strength will continue. Furthermore, China’s clamp down on steel overcapacity could add even more pressure to the market.

At least one Chinese iron ore producer has said China’s changes to its steel sector would mean it would likely leave the sector, and it is possible that more iron ore producers could do the same. Right now that is adding some negative sentiment to the iron ore sector. Over the long run; however, if enough iron ore producers decide to scale back production and/or leave the market, this could rebalance the market and the ensuing supply shortage could drive up prices.

Back to the near-term forecast for prices, Li Xinchuang, a vice chairman at the China Iron & Steel Association, expects steel production in China will probably contract this year and shrink further in 2017 as local demand slows, hurting the outlook for iron ore.

“There will be significant declines in the next three months,” said Li. ”If steel consumption and production are set to decline, then there’ll definitely be less demand for iron ore,” Li added in an interview with The Chicago Tribune.

There have been various bearish forecasts issued for iron ore prices for the next few years. Recently, Westpac Banking Corp forecast benchmark prices may sink below last year’s average of $38.30 a metric ton. The bank says the raw material will drop to a year-end low of $37 a ton, averaging $47 in the fourth quarter and $US38 in Q1 2017.


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