SINGAPORE: Iron ore dropped to near its lowest level in more than five years, reflecting sustained pressure from a supply glut and slower Chinese steel demand, with Citigroup seeing further weakness early next year.
China's steel and iron ore production is recovering after anti-pollution curbs imposed ahead of a global summit in Beijing early last month, Citigroup said. "However, more pain is expected in January, February, and beyond. Underlying Chinese steel demand is expected to once again weaken and the annual steel restock should be smaller than normal," Citigroup analyst Ivan Szpakowski said in a note to clients.
"Domestic iron ore mines have yet to fully accept lower prices though, with production likely to fall further and accumulated ore inventories should draw." Benchmark 62-percent grade iron ore for immediate delivery to China's Tianjin port dropped 0.4 percent to $69.40 a tonne on Tuesday, according to The Steel Index.
The price of the steelmaking commodity has fallen 48 percent this year, hitting $68 on Nov. 26, its lowest since June 2009. Citigroup last month said it expected iron ore to drop below $60 in 2015 due to renewed supply growth and further weakness in demand.
Production from China's large steel mills reached 1.71 million tonnes on Nov. 21-30, up 4.3 percent from the previous 10-day period, data from the China Iron and Steel Association (CISA) showed on Tuesday.
Output at the big mills fell nearly 6 percent in late October with industrial facilities surrounding Beijing ordered to curb production and later to shut temporarily for the Asia-Pacific Economic Cooperation meeting in early November.
China's implied domestic steel demand shrank 12 percent year-on-year in November after dropping 1.7 percent in October, Citigroup said, citing CISA and trade data and inventory at mills and traders. "This can be partly explained by the massive curtailments of the economic activity in six northern provinces around the APEC meetings and the subsequent pollution control measures, but the extent of the implied decline is nonetheless surprising," Szpakowski said. Steel demand is expected to weaken early next year due to tight credit conditions and softening manufacturing exports," he said.
"We also do not anticipate strong government stimulus, believing that recent actions have been moderate stabilizing measures." Shanghai rebar steel futures have fallen 30 percent this year. The most-traded May rebar contract closed up 1.3 percent at 2,563 yuan ($415) a tonne on Wednesday after recent losses.
<Center><b><i>Copyright Reuters, 2010</b></i><br></center>
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