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TheStreet Open House

Will Iron Ore Stocks Sink Like a Stone?

By Helen Burnett-Nichols

NEW YORK ( Minyanville) - Concerns over demand from China have weighed on iron ore prices this month, and the world's largest producers of the raw material ended May in the red. But some say sentiment could improve in the second half of this year. It's not clear if sentiment alone, however, can prop up the sector.

Laura Brooks, senior consultant, steel raw materials at CRU Group in London says weaker Chinese underlying demand, coupled with plentiful supply and ample stocks drove the iron ore market downward in May, as falling steel prices in China weighed heavily on sentiment in the iron ore market.

Iron ore prices fell from September 2011 levels of around $180 per ton to $138 by the end of the fourth quarter, according to data from The Steel Index and Bloomberg, on weaker demand. Although prices climbed back to $148 near the end of April, May has been a different story, with prices falling to $130 earlier this month.

"Iron ore prices thus fell back after reaching modest highs for the year in April, although they are now finding some stability," Brooks says.

Following substantial share price declines in 2011, year-to-date, Vale (VALE), the world's largest producer of iron ore, is down 14%, while BHP Billiton (BHP) has fallen 12.8%, and Rio Tinto (RIO) has moved 10.8% lower (to May 30).

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"Iron ore stocks have been retreating as general consensus is that China growth has been slowing and considerable production is coming down the pipeline," according to an April research note on the iron ore sector by the analyst team at Dundee Capital Markets.

As reported by The Australian, Wood Mackenzie principal iron ore analyst Paul Gray noted earlier this month that Chinese buyers of iron ore "appear to be holding back on purchases amid increasing global economic uncertainty" and are also deferring shipments, leading to an oversupply in seaborne markets.

Long-term, Dundee analysts say they believe China's "breakneck pace of growth" is unsustainable.

"It has already showed signs of diminishing with Q1/12 GDP growth falling to 8.1%, compared to 8.9% the prior quarter. Combined with potential oversupply we may see serious downward pressure on iron ore prices. China consumes more than 60% of the 1 billion ton annual seaborne iron ore trade, and therefore remains the largest influence on prices," says Dundee.

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