ANZ said that falling steel prices in China spell clear warning signs that may lead to iron ore prices declining as much as 40% in 2009. This is far deeper than market expectations of a 20% to 30% drop.
ANZ in a note said that prices for hot rolled coil steel in China have slid 15% since the start of February, after picking up on speculation of improving demand triggered by the CNY 4 trillion (USD 924 billion) stimulus package announced in November.
Mr Mark Pervan ANZ commodity strategist said that “China is the key market for iron ore demand accounting for a massive 48% of seaborne supply in 2008. The problem is that China steel prices are still trading at an average 20 per cent premium to international prices, suggesting the high level of domestic steel stocks will unlikely be reduced by increased exports.”
He added that “The worry for iron ore and coal producers is that high steel stocks will allow steel consumers to delay purchases for some time creating further downward pressure on China steel prices and ultimately, iron ore prices.”
Mr Pervan said that “The timing couldn’t be better for steel mills currently locked in negotiations with iron ore producers.”