Iron ore price in free-fall as it breaches US$85 per tonne

Sidney Nolan's The slip horse falling off a cliff

Sidney Nolan’s The slip horse falling off a cliff

Michael Sainsbury

The benchmark price of iron ore appears to be in free-fall as it slumped another 1.6% to close the day at US$84.30 for 62%Fe product at China’s Tianjin port as it continued its slide towards five years lows last seen in October 2009 during the global financial crisis.

At these prices about 25 per cent of the sector is losing money analyst at UBS wrote in a report issued this morning. The commodity tends to fetch its weakest prices of the year during September and October. The big question that miners are now waiting to have answered, palms sweating, is whether the traditional re-stocking that has taken  place during the past four years from December will help to send the price back up again.

“The iron ore spot price has declined for most of 2014,” UBS mining analysts in Sydney wrote in a client note this morning.”  But for the next 2 months, risk still lies to the downside. China’s crude steel production rates typically decline ~10% around Sep-Nov each year, as the summer peak in steel deployment passes.”

Worse still, all but the biggest Australian miners are getting discounts of up to 15% on the benchmark price – and this includes Fortescue Metals Group – as excess supply together with slumping demand growth from China creates a perfect storm for Australia’s biggest export. The iron ore price is tanking the country’s terms of trade and if it keeps sliding fire sales of iron ore juniors will start to occur – but will there be any buyers?

Here at Little Red Blog we are not so sure that the price will bounce back so well this year with storm clouds roiling over the Chinese housing sector that accounts for about 40% of steel demand in the middle kingdom.  We tipped two weeks ago that the price was headed below US$90 per tonne, a mark it breached last week when most analyst were saying US$90 would be the low water mark for the time being. Now US$80 and lower is now, by no means,  out of the question. In 2009 it plumetted to US$60 per tonne.

We have said it before and will repeat ourselves: look out below.