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Iron ore was the one commodity left largely unscathed in the recent market rout, until now. The price of the key industrial commodity, which is used to make steel, has slumped in recent weeks and is expected to keep dropping as demand falls on a weakening Chinese economy and fallout from the European debt crisis.
Steel mills have been cutting iron ore purchases as they curb production, while major iron ore producers such as BHP Billiton Ltd. and Rio Tinto PLC move forward with plans to ramp up output of the mineral.
The combination of lower demand and increased supply is putting pressure on iron ore prices, which had held steady even as other key industrial metals such as copper and aluminum were in freefall.
Iron ore prices have fallen by about 15 per cent in recent weeks to just below $150 (U.S.) a tonne, with some analysts now forecasting a drop to $140 by year’s end. That would be a nearly 30-per-cent dip from the $192 year-to-date high in February, not far from a record $202 in March, 2008.
The drop in demand comes as China, the world’s largest steel maker, reported this week that its economy grew by 9.1 per cent in the third quarter – its slowest pace since 2009. While its growth is strong when compared with other major economies, any gearing down of activity in China sends shivers across a commodities sector that relies heavily on the country’s appetite for its products.
“After months of very benign price movements over 2011, China’s steel and iron ore prices have lurched downward in recent weeks, and the declines seem to be gathering pace,” analysts at Macquarie Capital Securities Ltd. said in a note.
“It will be hard to see a strong turnaround in the iron ore price until mills have destocked the steel they are holding on site, and for this to happen we will need to see production pulling back.”
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