Miners feed China iron glut

Miners desperate to maintain revenue growth and appease investors have pumped iron ore production at record levels, only to increase the supply glut in China and trigger a 41 per cent plunge in the spot price this year.

Prices hit a five-year low of $US79.80 a tonne on Monday. Suggesting the bottom was not yet in, Dalian iron ore futures fell another 0.4 per cent and futures for steel rebar, the key end-product used in construction, yesterday tumbled another 1.3 per cent.

Corresponding sharp weakness in the Australian dollar has helped offset some of the pain. Monday's price of $90/t was 6.5 per cent above the two-year low of $84.50/t but less than half the $200/t peak reached in April 2010, a time when most plans to expand mine capacity were made.

Oversupply was still the major concern, Fortescue Metals Group chief executive Nev Power told a Melbourne mining conference yesterday, because supply was "not being cut back fast enough to reduce the overhang in the market".

Despite regular warnings from Chinese authorities over the past six months - including warnings that officials were committed to rebalancing growth away from infrastructure - miners have kept producing, expecting officials in the world's second- biggest economy would again stomp on the growth accelerator.

In August, Australian exports grew 35 per cent year-on-year.

Forecasts that China's higher- cost mines would drop out of the supply-demand equation have also not yet materialised.

According to data provider SteelHome, last week's China port inventories of 112.35 million tonnes was just short of the record of 113.7mt set in July.

ANZ commodity strategist Mark Pervan said supply would outstrip demand for the next two to three years.

China Iron and Steel Association deputy secretary general Li Xinchuang told the conference he expected iron ore to trade at about $US80/t in the long term.

But iron ore is not alone in suffering from falling demand.

The Bloomberg index of 22 physical commodities hit a five-year low yesterday as commodities as diverse as copper, oil, cotton and wheat all tumbled on fears of rising US interest rates and a strong US dollar.