The price of iron ore, the main ingredient in steel, has slumped by 35% this year to $84 a tonne, its lowest level since 2009. The market is caught in a “downward spiral”, says Mark Lyons of Citigroup.
The main problem is slowing demand for steel in China, where property, construction and infrastructure are all weakening as the government clamps down on lending. “Unless we get significant stimulus” in the second half of 2014, says Goldman Sachs, steel prices could weaken further.
The government is trying to wean the economy off credit-fuelled investment, so it appears reluctant to cut interest rates, says Neil Hume in the FT. There has only been a series of ‘mini-stimuli’ targeted at sectors such as clean energy and public housing.
In the meantime, stockpiles at Chinese ports are close to multi-year highs, while production at major miners, such as BHP Billiton and Rio Tinto, has been ramped up. It takes time for the industry to cut back capacity in response to tumbling prices, says Anglo American’s CEO Nark Cutifani.
“In this industry… a lot of capacity can be really sticky… the downside [to prices could be] longer than you anticipate.” CLSA’s Ian Roper reckons prices could hit $75 a tonne next year.