Author: Paul Ploumis 17 Apr 2014
Iron ore prices are set to slump in the second half as more steel companies in China will probably go bankrupt, hurting demand in the world’s largest user just as supply expands, according to Standard Chartered Plc.
Investors should sell September-through-December contracts on the Singapore Exchange, analyst Judy Zhu wrote in a note dated yesterday after meeting ore producers, consumers and traders in China over the past month. Prices are forecast to drop from an average of $129 a ton this quarter to $114 between July and September and $108 in the final three months, said Zhu.
Iron ore entered a bear market last month as economic growth in China slowed and mining companies in Australia boosted output, shifting the global seaborne market into a glut. Chinese mills, which account for almost half of world steel output, are struggling to get funds after banks imposed stricter lending conditions. Banks from Credit Suisse Group AG to Goldman Sachs Group Inc. predict lower ore prices over 2014.
"More steel mills are likely to go bankrupt this year," wrote Zhu, who is based in Shanghai. The expected closures "could have a greater impact on iron ore prices than the supply glut expected from Australia," she wrote.
Iron ore with 62 percent content delivered to the port of Tianjin declined 0.8 percent to $116.20 a dry ton yesterday, according to The Steel Index Ltd. Prices have lost 13 percent this year, dropping to a 17-month low of $104.70 on March 10.
"We recommend that investors sell September, October, November and December 2014 contracts traded on the Singapore Exchange because of the increased likelihood that prices will drop below $110 a ton," said Zhu. While prices may rebound above $120 a ton next month on a seasonal pickup in demand, a sharp drop from June seems inevitable, she wrote.