Price squeeze for iron ore juniors

Chinese traders are tipping iron ore will trade below $US60 a tonne next year because domestic property market woes show little sign of abating, a top UBS mining analyst was told.

UBS will not adjust its price forecasts after collecting intelligence during a tour of China last week but says lows not seen since financial year 2009 are possible. Iron ore for delivery to the port of Qinqdao last traded at $US75.47, down 46 per cent since December last year.

UBS mining analyst Glyn Lawcock says talk among steel mills and traders in China is that prices under $US60 a tonne is likely, largely because a weak Chinese property market is expected to persist in 2015.

Last week, Citigroup said it had been “bearish but not bearish enough on iron ore prices, and slashed its forecast for the next two years to $US65 ($75) a tonne, from about $US80. ANZ added fuel to fears for the industry, predicting the commodity is unlikely to breach the $US100 mark again, period.

A Morgan Stanley trip to China earlier this month, cited Chinese traders tipping iron ore will continue its dramatic crash to hit $US70 a tonne by the end of this year.

Intelligence gathered from the UBS tour to China last week found iron ore traders expect a modest rally in the lead up for Christmas, before retreating to a lower average price next year than in 2014.

If property remains weak and additional supply comes on again next year “then we could see iron ore trade lower than current levels with lows not seen since 2008-09 possible”, UBS noted.

The market was flooded with new supply this year but UBS, whose chief commodity analyst is Daniel Morgan, estimates a further 100 million tonnes of fresh supply could be introduced into the market next year, which is likely to weigh on price.

China’s property market will be a defining factor in 2015, after the government announced last month it would remove Home Purchase Restriction and discount mortgage rates for first home buyers, pushing home sales higher in October.

But property developers need to reduce inventory before the property market starts pick up, which would drive increased steel demand, UBS said.

China’s steel production is expected to come in at about 800 million tonnes this year.

In 2007, iron ore was trading at $US36 tonne, before its stratospheric rise to peaks of $US192 a tonne in February 2011.