23/01/2009 - 15:14

Iron ore prices forecast to fall 25%

23/01/2009 - 15:14

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Analysts at CommSec have forecast iron ore prices to fall by 25 per cent this year as Chinese consumers push for lower prices after being squeezed over the past five years.

Iron ore prices forecast to fall 25%

Analysts at CommSec have forecast iron ore prices to fall by 25 per cent this year as the Chinese push for lower prices after being squeezed over the past five years.

Iron ore price negotiations have kicked off early this year with 2008 prices to officially end on the last day of March to coincide with the start of the financial year for Japanese companies.

However Chinese buyers want to end the new pricing cycle in December 31 to coincide with the end of their financial year.

Last year, iron ore giants BHP Billiton and Rio Tinto locked in an average increase in iron ore prices of 85 per cent.

This year, steel producers are looking to settle contract prices quarterly and not yearly, with CommSec market analyst Juliana Roadley expecting it to work in favour of the miners as prices are forecast to recover later this year.

"CommSec expects China and Japan (two of the top 5 importers of iron ore) to take advantage of the recent slump in spot prices and drop in export demand to lock in cheaper contract prices," Ms Roadley said.

"We anticipate parties will agree on a 25 per cent cut in the price negotiated on iron ore fines to just under US$70 per tonne, down from the record high of US$92/tonne set in 2008, when demand for iron ore was at an all-time peak."

A deep cut in iron ore prices could mean producers will have to cut back production, roll back expansion plans and reduce staff to meet new budget requirements.

Rio Tinto has already flagged a 10 per cent cut in annual iron ore production in the Pilbara whule BHP has announced production cutbacks to only meet current demand requirements.

Ms Roadley added that spot prices for iron ore in China are now at more realistic prices, falling over 70 per cent since their peak in February last year of nearly $US200 per tonne on the back of the global slowdown.

However the price has rebounded in the last month as tight credit conditions have restricted funds needed for exploration, new projects and day-to-day running costs at mines.

Meantime, global iron ore output fell by 19 per cent November and Ms Roadley expects more cuts to come.

"The sharp decline in iron ore output is another reason why Chinese and Japanese steel makers would be happy to lock in prices as soon as possible," she said.

 

 

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