Iron ore prices could fall by year end amid declining commodities prices

Iron ore prices are forecast to fall back to US$50 (AU$66.14) a tonne by the end of this year, as found by research firm Capital Economics. The steel making ingredient shrunk to its lowest in a decade, US$38 (AU$50.26) a tonne, at the start of last year.

It subsequently doubled in value after China’s steel sector increased its demand. Over the last two months, the price for iron ore has witnessed a steady increase – contrary to analyst expectations of a correction. In February, the prices rose to US$95 (AU$125.66) a tonne.

However, since reaching its maximum last month, they have fallen nearly 10 percent. This decline comes on the heels of the shrinking of commodities prices as US dollar, predicting an increase in interest rates, strengthens.

"A slowdown in China would surely result in the prices of Australia's main commodity exports crashing back down to earth," Capital Economics' chief ANZ economist Paul Dales said in a note. The research firm said prices of iron ore could slide down to US$50 (AU$66.14) a tonne. At the same time, thermal coal prices could also see a decline, falling to US$70 (AU$92.59) a tonne from the current price of US$80 (AU$105.82) a tonne.

“The coming slowdown in economic growth in China will mean this commodity price windfall won’t last long,” Dales said. “Indeed, the slowdown will mean that Chinese demand for commodities falls short of expectations, probably at the exact same time that the global supply of iron ore and coal increases.” A downslide can have potential ramifications for the finances of the Federal and State governments.

Meanwhile, iron ore spot markets enjoyed a surge on Monday. Chinese steel futures saw an increase in overnight trade, as a result of which the strengthening of spot markets is expected persist on Tuesday. As noted by Metal Bulletin, the spot price for benchmark 62 percent fines enhanced by 1.78 percent to US$88.26 (AU$116.75) a tonne. The increase came as the first since Mar. 7, and the highest in terms of percentage since Feb. 27.

The Federal Governments expect iron ore prices to average US$68 (AU$89.95) a tonne until the end of June this year. They are forecast to further fall to US$55 (AU$72.75) a tonne in the September quarter. According to UBS Economics, should iron ore prices remain at their current levels, Canberra can earn a windfall of $10 billion (AU$13.23 billion) a year.

The falling prices are already showing signs of disappointment for some of the major miners. Shares of mining giants BHP Billiton, Rio Tinto and Fortescue Metals have slipped 12 percent, 15 percent and 13.5 percent respectively over the past three weeks.