Iron ore keeps falling despite Beijing rate cut

Iron ore fell to a fresh five-year low yesterday, increasing pressure on the world's largest miners of the steel-making commodity. Benchmark Australian ore for delivery to China fell 2 per cent to $68.60 a tonne, the lowest level since 2009, according to data from the Steel Index. Futures for May delivery were down 2.5 per cent on China's Dalian Commodity Exchange.
The iron ore price rallied briefly after China's first interest rate cut since 2012 on Friday, on the hope that looser credit could encourage steel mills to restock. But that lift failed to stem the rout as demand from construction and retail sectors remains uncertain. The price of iron ore is down almost 50 per cent since the start of the year.
"I don't think anybody expects to hit a price bottom any time soon," said Jessica Fung, analyst at BMO Capital Markets. The interest rate cut "might decrease the interest expense but it doesn't mean there will be more loans made that will drive metals consumption", she said.
China is the largest iron ore consumer and relies on imports for 75 per cent of that amount. But its steel industry has been hit by a slowing real estate market.
At the same time, top miners have ramped up production in an effort to gain share, confident that their cost of production will remain below the market price. Iron ore output at BHPBilliton, a leading producer, rose 17 per cent in the quarter ending in September.
The continued plunge in the price has unnerved investors. Shares in BHP were down 1.7 per cent in London yesterday after rising 5 per cent on Friday following the Chinese rate cut. They have dropped 14.7 per cent so far this year.
Andrew Mackenzie, chief executive, said at an investor meeting in Adelaide last week that BHP's iron ore operations were still profitable. According to UBS analysts, iron ore production costs at BHP and Rio Tinto are $49 and $45 a tonne, respectively.
Chinese iron ore miners, on the other hand, are suffering. Wood Mackenzie, the consultancy, estimates that between 50m and 60m tonnes of capacity in China has closed.
"Demand doesn't seem to be there at the minute," said Gavin Montgomery, a steel and iron ore analyst at Wood Mackenzie. "There seems to be more and more negative signs coming out from the property market, and supply growth is still arriving from the majors."
Additional reporting by James Wilson

Financial Times, 2014-11-26