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Iron ore prices to fall on new supply, weakening demand

Iron ore prices are expected to face downward pressure this year, as about 60 million tonnes of new production will enter the market and coincide with the end of inventory restocking at Chinese steel mills, according to Daniel Meng, a senior analyst with CLSA Materials Research.

Meng told S&P Global Market Intelligence on the sidelines of Mines and Money Asia in Hong Kong on April 5 that the ramp-up of the Roy Hill iron ore project in Western Australia and Vale SA's Serra Sul operations in Brazil will together result in new supply of about 60 million tonnes this year.

"We expect iron ore prices to fall to around US$60 per tonne by the end of this year," he said, adding that iron ore majors will still enjoy healthy margins at this price level.

On the demand side, Meng noted that the restocking cycle among Chinese steel mills is coming to an end, and destocking may begin soon.

"Last year prices were largely supported by the restocking cycle in China, which is coming to an end now," he said, adding that the industry will come back to supply-demand balance this year.

Meanwhile, Addison Dai, assistant vice president with DBS Vickers, was more bullish toward prices, pointing to China's dependence on seaborne iron ore.

"China's reliance on imported iron ores increased to 85% last year, so China is the price taker in the iron ore market," Dai said during a presentation at the conference.

She added that limited supply from domestic iron ore producers will also support prices, though there is worry in the market that they will increase output significantly following the price rally.

"Based on our study of [Chinese iron ore producers'] cost curves, unless price can stay stable at the level of above US$80 per tonne, domestic production will not increase significantly," Dai said.