March 11, 2014 / 3:47 AM / 4 years ago

REFILE-Lower iron ore prices here to stay - Citi

(Adds dropped word “prices” in 11th paragraph)

PERTH, March 11 (Reuters) - Iron ore prices are set to remain at lower levels given increased supplies of the steel-making ingredient, although the speed of their recent slump has taken the market by surprise, Citigroup said on Tuesday.

Spot iron ore prices posted their biggest one-day fall in more than four years on Monday after China’s trade balance swung into deficit and amplified fears of a slowdown in the world’s second-biggest economy.

“The broad move lower is here to stay,” Ivan Szpakowski, commodities strategist at Citi Research, said at an iron and steel conference in Perth.

“Prices are moving on a cyclical basis due to the increase in supply. The question had been the timing of it, and the rapidity of the fall, that’s something that had not been expected,” Szpakowski said.

Iron ore for immediate delivery to China .IO62-CNI=SI fell 8.3 percent, its largest one-day percentage fall in 4-1/2 years, to $104.70 a tonne, its weakest since October 2012, according to data compiled by The Steel Index.

Mining giant Rio Tinto , which is rapidly boosting production, said its ramp-up was justified. Price volatility was expected to give way to stronger underlying demand growth from China due to urbanisation and the need for new construction.

“We continue to see attractive long-term demand for iron ore, particularly from China,” Rio Tinto iron ore chief Andrew Harding told the conference.

“There will be short-term volatility, proof of which you are seeing this week,” he said.

Rio Tinto is allocating $400 million to help expand its Pilbara iron ore production capacity to about 350 million tonnes a year by 2017 in a bid to capture more trade with Chinese steel mills.

Capacity is earmarked to increase by more than 60 million tonnes a year between 2014 and 2017.

Harding said that lower production prices would help insulate Rio Tinto from cyclical downturns in iron ore prices.

Efforts were underway to reduce production costs below last year’s average of $20.80 a tonne, down 11 percent from a year earlier.

Iron ore prices, which rose above $190 a tonne in 2011, had been expected to average about $121.50 in 2014, according to a Reuters poll in January, easing further in 2014 as miners ramped up supplies of iron ore. (Reporting by James Regan; Editing by Richard Pullin)

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