Iron ore prices have fallen to their lowest since late 2009 as steelmakers in Europe curtail purchases, forcing miners to sell their output in the congested Asian market.

 

Iron ore traders and brokers said Vale of Brazil, the world’s largest iron ore miner, was diverting part of the material usually identified for European steel mills into the Asian spot market at the precise moment Chinese consumption slows down, forming a glut.

 

China is the world’s largest importer of iron ore and consumption there has slowed as the economy weakens. Still, Beijing last month imported nearly 56m tonnes of ore, up 6 per cent from the same period of last year.

 

Iron ore has been a cash-cow for the mining sector during the past five years and the current drop in prices is affecting substantially the profitability of blue-chip miners Vale and London-listed Rio Tinto, BHP Billiton and Anglo American.

 

Cost of Chinese steel has also plunged to levels last seen nearly three years ago, emphasising the depth of the slowdown in the world’s second-biggest economy.

 

Hot rolled steel, an industry benchmark, traded at Rmb3,562 ($560) a tonne this week, down 19 per cent since April. Even as steel prices declined, Chinese steelmakers have continued to ramp up production, intensifying fears of a price crash in coming months unless demand were to recover considerably.

 

Steel is used in everything from bulldozers to skyscrapers and therefore demand for the metal – and its main ingredient, iron ore – depends on the strength of the global economy. Of all countries, China has contributed most in recent years to demand for steel due to annual economic growth of about 10 per cent.

 

“The real risk in iron ore and the commodities market [in general] is the direction of China,” said Andrew Dale, head of resources research in Asia for Macquarie.

 

Analysts at Nomura said they were “very concerned” that Chinese steel mills had increased production at the same time as prices fell and many of them had struggled to make a profit. “The recent collapse in steel and iron ore prices suggests to us that we have reached the point in the cycle where a major destock is required,” Nomura said. “If production is not cut voluntarily, imbalances will continue to build, increasing the risk of a large, involuntary cut in steel production.”

 

Last month the China Iron and Steel Association said domestic steelmakers saw profits plunge 96 per cent in the first half compared with a year ago, turning the industry into a “disaster zone”.(Source: Financial Times)