Iron ore price may decline 20% in 2009

Iron ore prices are likely to decline by 15-20 per cent this year on falling demand from global steel producers because of production cut, according to the latest Fitch Ratings report.

After four years of continuous price hikes, the price of steelmaking raw material declined from the peak of $145 per tonne in July to $65 per tonne by December on China’s disinterest on revamping closed steel mills after the Beijing Olympics. Although, China has already started working on these mini steel mills, the action is inadequate to help raise Indian iron ore prices.

This is in contrast with Indian miners’ observation as they were expecting a better price this year after the lull of 2008. Last year, about 42 mini steel mills in and around Shanghai were forced to suspend production because of a preventive measure for the Olympic Games preparation in September.

But, these steel mills delayed resumption because of global economic slowdown that resulted into lower steel demand. These mills are gradually coming into stream which is likely to revive iron ore demand from India, an exporter said.

With the downside risks partly offset by the production cuts by major steel producers, the demand for steelmaking raw materials is likely to decline heavily this year. However, any upturn in demand from China and infrastructure spending in India may boost domestic iron ore and steel demand, the report added. In 2008, the highs seen by iron ore prices in most of 2008 were a function of the convergence of a number of factors related to demand and supply, freight and foreign exchange that are now unwinding and leaving iron ore exposed to potentially significant falls. Given the steel inventory is piling up on fewer construction and infrastructure activities, the existing capacities will be under tremendous pressure despite limited capacity additions coming up in 2009.

Fitch believes steel demand in India would improve following the aggressive expansion of Central Bank liquidity provisions since early September, in combination with major fiscal injections into the US and European banking systems, as well as major stimulus packages announced for China and expected for the US.

Steel demand slowed in major consumer regions like China and other Asian markets on global economic slowdown. This has also resulted into a huge inventory pile-ups which, with declining exports diverting supply to domestic markets, are likely to put domestic prices under more pressure. The report further said that the capacity utilisation levels will be under pressure despite limited capacity additions coming up in 2009.