GRAPHIC-Bearish demand expectations challenge iron ore's price resilience

Credit: REUTERS/COOPER INVEEN

By Amy Lv and Tony Munroe

BEIJING/SINGAPORE, Feb 28 (Reuters) - Iron ore prices, long resilient despite China's gloomy economic outlook, have tumbled since the end of the Lunar New Year holiday, sparking concerns around faltering demand and denting mining stocks in top producer Australia.

Prices have fallen by nearly 8% since China, the world's biggest consumer of the key steelmaking ingredient, returned to work on Feb. 19, pressuring Australian mining stocks .AXMM to four-month lows on Tuesday.

Even Beijing's biggest-ever cut in the benchmark mortgage rate to revive the ailing property market failed to support prices, which typically get a boost from such stimulus.

The declining prices aren't necessarily bringing much relief to steelmakers, either, as many of them are still using stocks bought at higher prices even as steel prices have dropped.

China is by far the world's top steel producer.

"Mills depending more on seaborne cargoes may suffer deeper losses because of higher production costs as the cargoes they consume were bought when prices hovered higher," said a central China-based steelmaker.

Ore prices had risen following the Lunar New Year holiday last year, and ended the year stronger despite weak Chinese steel demand, defying market expectations.

However, China instructing heavily indebted local governments to delay or halt some state-funded infrastructure projects has cast a fresh shadow on demand, on top of the persistent drag from the property sector.

Many mills chose to draw down inventories instead of placing new orders from the portside market as ore prices fell, according to two Chinese steelmakers and three traders.

"This year might be even harder than last year in terms of garnering profit. We will continue to maintain a low inventory of raw materials," said a manager at a steel mill in north China.

Both steelmakers requested anonymity as they are not authorised to speak to media.

Thin margins have led steelmakers to hold off from ramping up production prior to the start of peak demand season in March, analysts said.

"Steel markets are weak and there is still little confidence in the economy," Tomas Gutierrez, head of data at consultancy Kallanish Commodities, told Reuters.

"Beijing's ability to engineer economic growth by traditional means is fading."

However, despite stronger-than-usual supply in a typically slower shipment season creating headwinds for iron ore prices, several market participants said they expect prices to rebound soon as a demand recovery looms ahead, with weather increasingly favourable for construction activity.

Galaxy Futures said in a note on Tuesday that steel demand may beat expectations in the first half of the year on robust manufacturing and export activity and as funds earmarked for during the fourth quarter for infrastructure spending are released.

Updated iron ore price movement as of Feb 26 https://tmsnrt.rs/48xpRWn

Iron ore inventory at Chinese steel mills surveyed at the lowest level since last Dec https://tmsnrt.rs/4bRMqrC

Iron ore stocks at major Chinese ports at a 10-month high https://tmsnrt.rs/48w0fsQ

Average daily hot metal output stays at a relatively low level https://tmsnrt.rs/3URGvg3

Seaborne iron ore prices https://tmsnrt.rs/3uYwbZ4

(Reporting by Amy Lv and Tony Munroe; Editing by Varun H K)

((Amy.Lv@thomsonreuters.com;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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