Iron ore seen wiping out gains as China turns to home grades

Iron ore’s sell-off this year will be so steep that prices will return towards $40 a metric tonne, all but wiping out gains since the start of 2016, according to consultancy Mysteel Research, which expects a ramp-up in Chinese supply to reduce steel mills’ demand for overseas grades.Ore is set to decline to a range of $40 to $50 a ton by year-end, with an annual average of $65, analyst Yu Chen said by phone from Shanghai last week. Chinese mills’ dependency on overseas ore is falling due to “quite a lot of incremental supply” from domestic mines, Yu said. Chinese suppliers are returning to the market after the winter lull and attracted by higher prices.The raw material for steel-making entered a bear market this month as a procession of analysts, Australia’s government and even some miners said gains to 2014 highs were unsustainable amid rising supply. Resilient demand for overseas high-grade ore had been supporting prices even as stockpiles at Chinese ports kept hitting record levels, according to Yu. That’s now changing.“Demand for high-grade ore is falling,” said Yu. “It’s stacking up at ports. The support for prices is disappearing. Traders are under great pressure to dump cargoes.”Robust demand for high-grade iron ore has kept the market artificially tight, and elevated port inventories indicate there’s a surplus in China, according to HSBC Holdings. Weaker steel demand in the third quarter could spur mills to switch back to low-grade, more cost-effective feed that’s in abundance at the ports, the bank said in an April 12 report.This may be starting to show. Since peaking at 132.5mn tonnes on March 24, the port stockpiles have shrunk for three straight weeks to 130.4mn in the longest declining streak since September, according to Shanghai Steelhome E-Commerce Co. Higher-grade material accounts for a larger share of the inventories compared with earlier this year, Goldman Sachs Group said last week in a report that affirmed its view iron ore could fall to $60.Spot ore with 62% content in Qingdao dropped 9% last week, including the biggest one-day slump in more than a year, and was at $66.25 a tonne yesterday, according to Metal Bulletin. That’s the lowest since November, and a retreat from a recent high of $94.86 in February. The benchmark’s averaged about $84 this year, while the record low of $38.30 was hit in December 2015.The 3.5% decline yesterday was preceded by a slump in futures. The SGX AsiaClear contract tumbled as much as 5.6% to $63.95 a ton in Singapore, while the price on the Dalian Commodity Exchange sank 2.9%. Markets in Australia and most European countries are closed.The world’s biggest iron ore miners, including Rio Tinto Group and BHP Billiton in Australia, and Brazil’s Vale, will be able to withstand the plunge in prices because of their race to cut costs, Adrian Doyle, a Sydney-based consultant at researcher CRU Group said last month. Other miners are likely to feel margin pressure at around $45 or $50 a ton, a level that has come down from around $60, according to Doyle.