Iron ore hits lowest since July as Chinese mills destock

Wed Jan 22, 2014 9:50am IST

* Iron ore has dropped 8.2 pct so far this year
    * Vale says fall in iron ore prices temporary
    * Shanghai rebar has modest pickup after hitting record low

    By Manolo Serapio Jr
    SINGAPORE, Jan 22 (Reuters) - Iron ore fell to its weakest
level in more than six months amid slow demand from top importer
China and prices, which have already lost 8 percent this month,
are at risk of sliding further.
    Most Chinese steel producers are running down their stocks
of raw material iron ore given the poor demand instead of
replenishing them as they have done in past years ahead of a
week-long Lunar New Year break that begins on Jan. 31.
    That means a weak start for the year for iron ore after
displaying resilience in the last months of 2013 and chances are
prices could ease further as global miners such as Rio Tinto
 and BHP Billiton work to boost global
supplies.
    China's daily crude steel output dropped for a third
straight month to just above 2 million tonnes in December as
producers responded to weaker demand, prompting most to destock
iron ore inventories rather than rebuild them. 
    "Production seems to be running at reasonably muted levels
and mills are looking at their iron ore stockpiles and seeing
that their steel orderbook isn't increasing, so there's no need
to hold a lot of iron ore inventory," said Graeme Train,
Shanghai-based commodity analyst for Macquarie Group.
    Iron ore for immediate delivery to China's Tianjin port
.IO62-CNI=SI fell 1.3 percent to $123.20 a tonne on Tuesday,
its lowest since July 8, according to data provider Steel Index.
    Iron ore, which mostly steadied at levels above $130 since
August before breaching that support last week, has fallen 8.2
percent since the year began.
    "The second quarter should look better if we do get a usual
sequential increase versus the Chinese New Year period. If mills
go into the second quarter understocked then that should be
really bullish for the market," said Train.
    "But the question is what if that sequential momentum
doesn't materialise?"
    Still, top iron ore miner Vale's chief executive
Murilo Ferreira believes that the decline in prices is
temporary, saying the fundamentals of the Chinese economy remain
solid. 
    That is why the big miners continue to lift output. BHP
Billiton said on Wednesday its iron ore production rose 16
percent year on year in the December quarter. 
    But worries about a slower Chinese economy, with growth
cooling to 7.7 percent in the fourth quarter, and tighter credit
are dimming the outlook for steel demand in the world's top
consumer of the alloy.
    The most-traded rebar contract for May delivery on the
Shanghai Futures Exchange hit a fresh record low of
3,403 yuan a tonne on Wednesday, before regaining some ground in
line with firmer Chinese equities. It was up 0.2 percent at
3,427 yuan by midday.
    High stockpiles of imported iron ore in China reflect slower
domestic appetite for the commodity. Imported iron ore piled
across the country's major ports stood at 91.55 million tonnes
as of last week SH-TOT-IRONINV, the highest since November
2012, based on data from Chinese consultancy Steelhome.
    "Mills are said to be holding above-average stocks of 36
days. While this is seasonally normal, the numbers have been
further exaggerated by the recent falls in output rates due to
tumbling margins," Standard Bank analyst Melinda Moore said in a
note.
    Iron ore for May delivery on the Dalian Commodity Exchange
 was up 0.4 percent at 852 yuan a tonne, after touching
a contract low of 843 yuan on Tuesday.    
  Shanghai rebar futures and iron ore indexes at 0345 GMT
                                                                                                     
  Contract                          Last    Change   Pct Change
  SHFE REBAR MAY4                   3427     +6.00        +0.18
  DALIAN IRON ORE MAY4               852     +3.00        +0.35
  THE STEEL INDEX 62 PCT INDEX     123.2     -1.60        -1.28
  METAL BULLETIN INDEX            128.79     +0.00        +0.00
  Dalian iron ore and Shanghai rebar in yuan/tonne
  Index in dollars/tonne, show close for the previous trading day
 
 (Reporting by Manolo Serapio Jr.; Editing by Anupama Dwivedi)
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