Iron ore poised for 40 percent annual drop, outlook gloomy

Iron ore rose in the final trading session of the year, but was poised to end 2015 as one of the worst performing commodities of the year due to a global glut and shrinking demand at top consumer China. The spot price for iron ore slid 40 percent this year, the third straight year of losses. The market is oversupplied as China's steel demand has continued to decline after falling in 2014 for the first time in more than three decades.
Iron ore has been easily the most hard-hit industrial commodity, outstripping losses in crude oil and copper. "Iron ore will fluctuate and hit lower levels next year," said a Shanghai-based trader, who expects the spot price to trade around $40 a tonne in 2016. Iron ore for immediate delivery to China's Tianjin port rose to a one-month high of $42.90 a tonne on Thursday, up nearly 1 percent from the previous session, according to The Steel Index. It had risen nearly 3 percent on Wednesday.
The most-active May iron ore contract on the Dalian Commodity Exchange rose 0.5 percent to 322 yuan($49.60) a tonne. The most-traded May rebar contract on the Shanghai Futures Exchange closed down slightly at 1,784 yuan ($274.81) a tonne. Iron ore physical buying has risen in recent days as Chinese buyers stock up ahead of an expected decrease in seaborne supply early next year, another factor boosting prices, analysts have said. But the deal activity and the rally will be short-lived, as there has been no significant change in underlying demand, they cautioned.
Steel mills in China are lowering production on weak demand, thus reducing the need for iron ore. And this trend will continue into next year, said the Shanghai-based trader. "We will see small- to mid-sized mills shut down or stop production. We may see more consolidation in the steel industry next year," he said. While this may further decrease demand for iron ore in the near term, demand could begin to stabilise or even recover after the consolidation, he added.
More than 50 million tonnes of steel capacity have shut in China this year, including state-owned and private steelmakers, according to industry consultancy CRU. China's government is looking to slash even more steel capacity, state news agency Xinhua reported earlier this month. But analysts believe the exiting supply would still not be enough to support prices as top, low-cost producers boost output further and demand continues to shrink.