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Iron Ore Prices Set to Fall Further

Stocks in this article: RTP

NEW YORK ( TheStreet) -- Iron ore prices are poised to decline further this year following a 14% drop so far in the third quarter from the second quarter.

Prices are averaging $143 a tonne for the third quarter, vs. $167 a tonne in the second quarter, according to Metal Bulletin prices.

Last week, global mining giant Rio Tinto (RTP) told Australia Associated Press that iron ore prices are set to decline 13.3% during the fourth quarter. The company's iron ore division chief executive Sam Walsh foresees prices dipping to $127 a tonne, based on the average index price during the previous quarter.

The Steel Index, which tracks 62%-grade iron ore arriving at China's Tianjin port, expects prices to plunge by around 12% during the fourth quarter. Assuming the current average of $143, the prices could hover around the $125-a-tonne mark.

In a recent development, China Minmetals Corp. told Bloomberg that the China Iron & Steel Association is negotiating with iron ore producers to fix a monthly price for the raw material. However, the move from quarterly pricing to monthly pricing increases the prospect of Chinese steelmakers defaulting on contracts, Minmetals' Vice President Feng Guiquan was reported saying.

This year, Rio, BHP Billiton (BHP), and Vale SA (VALE), which together account for about 70% of global iron ore production, fixed iron ore prices on a quarterly basis instead of the annual pricing mechanism followed earlier.

The steel industry will benefit from lower iron ore prices as it reduces the cost of production. China's steel manufacturers stand to gain from the drop, as the country is the largest steelmaker and top consumer.

Sluggish demand forced nearly 40% of Chinese steelmakers to suspend production due to a 17% drop in steel prices and as the government attempted to cool the overheated property market. Looking forward to 2010, MEPS, an independent supplier of steel market information, forecasts China's steel production to grow 10% year over year to 627 million tonnes from 567.8 million tonnes.

China's iron ore imports for the first seven months ending July 2010 stood at 360 million tonnes, up 1.5% year over year. The country's iron ore imports could reach 650 million tonnes during 2010, according to Wu Wenzhang, an analyst from steelhome.cn.

The likely surge in iron ore imports is attributed to lower prices and reduced stockpiles. However, China's steel production has declined 8% from May to July this year. Production fell to a five-month low of 51.7 million tonnes in July, down 3.9% month on month but up 2.2% year over year.

Karvy Global Services (www.karvyglobal.com), a subsidiary of the Karvy group (www.karvy.com), provides specialized research in asset classes including stocks, mutual funds and insurance to leading Wall Street firms.

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