Iron ore sinks below US$50 on fears of extended collapse

[SINGAPORE] Iron ore's bear market deepened as prices fell below US$50 a metric ton on concern that low-cost production will expand further while demand stumbles in China, which is facing an equity market rout that threatens to hurt the economy.

"Supply is now outpacing demand, pointing to renewed price pressure," said Gordon Johnson, an analyst at Wolfe Research LLC in New York. Iron ore may collapse significantly below the US$47-a-ton low that was set earlier this year, he said.

Commodities from metals to crude sank this week on concern consumption is stalling in China, where authorities are battling to contain the stock market rout, and as investors confront the prospect Greece may be ejected from the euro zone. Iron ore's drop highlights that the factors of surging supply and weaker demand growth, which dragged prices to the decade-low in early April, remain at the forefront. Miners fell, with Rio Tinto Group at the lowest in two years, while China futures plunged.

"The bearish sentiment from China's stock markets have spread to iron ore," Wu Zhili, an analyst at Shenhua Futures Co. in Shenzhen, said on Wednesday. "The slump in equities reflects a lack of confidence in China's economy, which damps the demand outlook for industrial commodities." Ore with 62 per cent content delivered to Qingdao sank 5.1 per cent to US$49.60 a dry ton on Tuesday, falling for a ninth day, according to Metal Bulletin Ltd. Prices entered a bear market on Monday, dropping more than 20 per cent from a June high. On the Dalian Commodity Exchange, futures plunged 7.2 per cent to 349 yuan (US$56.20) a ton on Wednesday, a record low.

Shares in Rio Tinto lost as much as 2.2 per cent to A$50.61 in Sydney, the lowest since June 2013, and traded at A$50.62 at 12:19 p.m. local time. BHP Billiton Ltd. fell 2.4 per cent to A$25.61, while Fortescue Metals Group Ltd. declined 4.2 per cent.

Iron ore's nine-day decline was spurred by figures showing inventories at ports in China rebounded, while exports in June from Australia's Port Hedland were a record. So far this year, prices lost 30 per cent, bottoming at US$47.08 a ton on April 2.

The Minerals Council of Australia, which counts BHP and Rio Tinto as members, defended local miners' policy of adding output. Even as prices drop, Australia's top producers will generate more than A$615 billion (US$459 billion) in revenue in the 10 years to 2024, surpassing the previous decade's total, the council said on Tuesday in a policy paper.

Iron ore may decline to average US$50 this quarter as supply expands, led by mines in Australia, and there are further cuts to steel output, according to Morgan Stanley. The bank is more bullish over the longer term as some high-cost mines may close and the top producers become less competitive in their behavior, analyst Tom Price in London said in a note received on Tuesday.

The slump in prices validated forecasts from banks including Goldman Sachs Group Inc and UBS Group AG for renewed declines, with Citigroup Inc predicting prices will drop to less than US$40 a ton in the final three months as supplies swell.

"The severe slump in iron ore, and the pace at which it declined, have astounded the market," said Huang Huiwen, a Shanghai-based analyst at Shanghai Cifco Futures Co. "There are expectations of further supply increases."

BLOOMBERG