SINGAPORE/SHANGHAI, June 19 (Reuters) - A slump in Chinese demand for steel has poured cold water on a rally in iron ore this month, with prices for the raw material likely to drop over the rest of the year, traders and analysts said.
Iron ore surged 40 percent from a decade-low in just over two months as dwindling stocks at China’s ports suggested tighter supply in a market that had been hit hard by plentiful ore.
But China’s appetite for steel has been shrinking as its economy slows and is now taking a further hit as construction eases over the summer, forcing mills to cut production. January-May output fell nearly 2 percent from the year before as consumption dropped 5 percent, based on government and industry data.
Prices will also be pressured by indications that iron ore shipments are starting to pick up again, after speculation that some miners and traders had been holding back supply to bolster prices.
“We believe current iron ore prices are too high and the rally should turn out to be self-defeating as necessary supply cuts are unlikely to happen, keeping the market in surplus,” said Carsten Menke, analyst at Julius Baer in Zurich.
After hitting a near five-month high of $65.40 a tonne .IO62-CNI=SI in early June, iron ore lost 6 percent this week after Shanghai rebar steel futures slid to the lowest since their 2009 launch.
Shanghai rebar prices have lost 17 percent so far this year.
Menke said iron ore could fall below $40 per tonne in a worst case scenario if China’s construction sector weakens and the overall economy slows further.
A decline in stocks of imported iron ore at China’s ports to the lowest since 2013 fueled the sharp price recovery amid speculation miners were delaying shipments and traders holding off on offering cargoes.
China’s domestic iron ore output dropped 11 percent in the first five months of 2015 as tumbling prices forced high-cost producers out of the market.
“There is no logic in holding back supply in the hope prices might go up,” Andrew Harding, iron ore chief at Rio Tinto , said on the No. 2 producer’s website.
“They might momentarily increase, but we’re not in the business for the moment, we’re in the business for the long term.”
The lowest cost iron producer, Rio plans to ship around 350 million tonnes in 2015, up from 300 million tonnes last year.
Weekly data on shipping from key supplier Australia suggests that exports in early June have been decent and should rise significantly in coming months, Citigroup said in a report this week.
“We thus expect iron ore prices to reverse sharply and decline over the coming months,” said Citi, which sees iron ore averaging $51 a tonne this year and $40 in 2016.
Editing by Joseph Radford