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[MANILA] Iron ore is likely to drop to fresh decade-lows below US$40 a tonne, with shrinking steel demand forcing Chinese producers to cut output while there are no signs that top iron ore miners will curb production.
The commodity hit hardest by a slowing Chinese economy, iron ore has lost 43 per cent this year - far more than oil and copper - as growing low-cost supply expanded a global glut.
The US$10 billion Roy Hill iron ore mine is set to ship its first cargo, marking the start-up of the last of the mining-boom era mega projects in Australia.
"Until there's some sign that either demand is stabilising or supply growth is weakening there's going to be downward pressure on prices," said Daniel Hynes, senior commodity strategist at ANZ. "We could see it in the US$30s." Iron ore for immediate delivery to China's Tianjin port fell 2.4 per cent to US$40.60 a tonne on Wednesday, according to The Steel Index (TSI). That was the lowest level ever recorded by TSI which began assessing prices in 2008.
Based on the annual pricing system that preceded the spot-based system and TSI records, iron ore stood at US$38.27 a tonne for most of 2005 and at US$22.31 the year before, according to data compiled by Goldman Sachs.
"Some mills are showing interest on some cargoes but it is still difficult to get any deal done. There's a big gap in bids and offers," said an iron ore trader in Shanghai.
Chinese steel prices fell further on Thursday. The most-traded May rebar on the Shanghai Futures Exchange closed down 1.3 per cent at 1,635 yuan (S$360.8) a tonne. The contract touched a record low of 1,618 yuan on Tuesday.
On the Dalian Commodity Exchange, May iron ore dropped nearly 1 per cent to 290 yuan per tonne.
Steel demand in China continued to fall this year after declining in 2014 for the first time in more than three decades, sinking steel prices to record lows, widening losses among producers and prompting many of them to cut output further or close.
The unabated growth in iron ore supply, particularly among the lower cost suppliers in Australia and Brazil, has similarly pressured prices.
ANZ's Hynes doesn't expect them to resort to production cuts anytime soon.
"They've lowered their cost of production enough to keep margins positive and purely on that basis there's certainly no financial stress which could result in production cuts," he said.