Iron ore prices to fall further in coming months

In a situation where steel consumption all over the globe has gone down substantially, a lot of international iron ore (a raw material consumed in large quantities) mining companies in the December quarter have reported a jump in iron ore production. Companies like BHP Billiton, the world’s biggest mining company, has forecasted record iron ore production - marginally more than 159 million tonnes for the current fiscal year.

The increase in the forecast was after reporting a jump of 22 per cent YoY to 41 million tonnes during the December quarter 2011. Not only BHP Billiton but other mining companies like the Fortescue Metals Group, the third-largest iron ore mining company in Australia, has reported a 19 per cent rise in the December quarter iron ore output. Further, it has unveiled plans to almost triple its production to 155 million tonnes by mid-2013 from 55 million now.

Looking at the production growth in iron ore it seems that the slowdown in steel demand has been neglected by the miners. And the higher production of iron ore in the short term can lead to excess supply of iron ore in the world. China, the world’s largest steel producer that consumes half of the global output of iron ore, is going through a slowdown phase. The country during the December quarter has expanded at its weakest pace in 2.5 years.

The crude steel production worldwide for November 2011 is up by 1 per cent to 116 MT versus 6 per cent growth in 2010. By November 2011, the overall production declined by 5 per cent as compared to the 12 per cent growth in 2010. Whereas, China, the largest contributor to global steel production (45 per cent of world production), has also seen a slight decline of negative 0.29 per cent to 49.9 MT for November 2011 as compared to the same period last year.

Given the kind of scenario that is currently building up all over the globe, we don’t see much pick-up in the steel demand in the coming quarter as well. Therefore it is quite evident that if the demand for steel slows down, the demand for iron ore will also slow down due to its direct relationship.

The iron ore prices in the international market in the last six months have come down from USD 172 per tonne to USD 136. And we can expect a USD 10 to 15 reduction in the prices in the coming months on the back of slow steel consumption and the higher supply of iron ore from the big international players.