Iron ore rallies on China inventory fall

The price of iron ore rallied more than 3 per cent on Monday supported by a reduction in Chinese steel inventories and the decision by an Australian producer to suspend production.

Benchmark ore for immediate delivery into China gained $1.50 to $48.80 a tonne, according to a price assessment by the Steel Index. This month, the steelmaking commodity hit $46.60, the lowest level since TSI began compiling records in 2008.

Traders said the rally had been prompted by a reduction in the stocks of steel held by Chinese mills and reaction to Friday's news that Atlas Iron would suspend production at its mines in Australia, removing around 13m tonnes of ore from the market.

The price of iron ore, a key source of profits for several major mining houses, has slumped almost 60 per cent over the past year as supply growth has overwhelmed tepid demand.

But few analysts expect a dramatic recovery in prices because demand in China is slowing and the major producers, which include BHP Billiton, Rio Tinto and Vale, are pushing ahead with plans to increase production. These companies are betting their low-cost supply will displace high-cost producers in China and elsewhere.

While some supply has been knocked out of the market because of the fall in prices, further closures are needed to help balance the market, according to analysts. But for that to happen prices may have to remain lower for longer, they say.

Citigroup expects the price of iron ore to fall to $36 in the third quarter and remain below $40 for the rest of the year as the industry's leading producers continue to raise production even as demand from China slows.

"Depreciating currencies of major exporters, falling diesel prices and lower freight cost are bringing down supply costs, and remaining production is increasingly resilient," said Citi in a report. "Prices need to fall significantly below cash costs for a prolonged period to induce curtailments."

Meanwhile Standard & Poor's, the rating agency, cut its assumptions about benchmark iron ore prices and warned that a group of miners including Vale, Rio and BHP were vulnerable to a ratings downgrade that could raise borrowing costs.

S&P said it believed the supply and demand imbalance in the market could last for several years and had lowered its price assumption for this year and next to $45 and $50, down from $65 previously.

"It will take time for high-cost producers to cut supply. However, the extent and pace of closures is unclear, and a recovery in iron ore prices will probably also require demand growth to fully absorb the material new supply this year," the agency said.

Anglo American, Fortescue Metals and Exxaro were also among the companies that could be potentially downgraded once S&P reviews its ratings within two to three weeks.

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