China's Cooling Economy Has Caught Some Iron Ore Producers Off Guard And Will Likely Drive Prices Down

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An iron ore deposit in Australia. The central bank in that country eased monetary policy on dimmer-than-expected views of the economy.
An iron ore deposit in Australia. The central bank in that country eased monetary policy on dimmer-than-expected views of the economy.

Iron ore, one of the world's most fundamental commodities, may be headed for a price drop after several months of rising prices have prompted producers to boost output at the same time that demand in China is waning.

China consumes around 60 percent of the global seaborne market. One of the contributing factors is China’s construction boom, which increased prices of iron ore to a peak of around $200 metric tons.

The Financial Times on Wednesday reported that new supplies from Australia, the largest producer of iron ore, and new shipments from Brazil have been picking up and are contributing to the falling prices.

Billiton Limited (NYSE:BHP), Fortescue Metals Group Limited (ASX:FMG) and Rio Tinto plc (NYSE:RIO), all major Australian iron ore producers, have spent billions of dollars on new iron ore projects to capitalize on China’s construction growth. But these new projects are coming on stream as Chinese growth is beginning to slow.

As demand slows down, major iron ore companies, like BHP, Fortescue and Rio, are looking to squeeze out the competition by producing 34 million metric tons more in the fourth quarter compared to the period a year ago, according to Citigroup research.

“We are already seeing evidence of new supply coming on line from the expansions at BHP, Fortescue and Rio Tinto,” Melinda Moore, an analyst at Standard Bank in London, said. “Combined with improved shipments rates by [Brazilian mining giant] Vale, we believe this supply will have a more permanent depression on pricing below $125.” Prices this year have averaged $136 per metric ton.

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