China places tall order for iron ore

According to Proactive Investors, Chinese iron ore consumption is likely to increase in coming months as more infrastructure projects in the country’s central and western provinces get underway.

China, which currently buys more than 60% of the world’s seaborne iron ore, is tipped to use 1 billion tonnes of the steel-making ingredient in the next year. The forecast comes as the country managed to consume 15% more iron ore in September 2013 than it did a year earlier.

Investment in fixed asset projects, particularly railways, is set to spur on consumption as the country undertakes a number of ‘mini-stimulus’ programs. These will likely continue into the new year as the worldwide economy becomes more optimistic.

Continued infrastructure investment has shrugged off bearish forecasts for a lower iron ore spot price. In September, year-on-year investment was up 20.2% to 30.9 trillion yuan ($5.07 billion). Proactive Investors said, “Interestingly, private investors ploughed 19.6 trillion yuan into fixed asset investment, almost twice as much as state-owned investors.”

Some research houses, including Macquarie Commodities Research and Goldman Sachs, had previously predicted that the iron ore spot price could drop below US$90 per tonne in the medium term as projects from some of the world’s biggest iron ore miners come online. For example, Rio Tinto’s (ASX: RIO) proposed Pilbara 360 expansion as well as other massive developments from both BHP (ASX: BHP) and Fortescue (ASX: FMG) could result in a supply glut in iron ore markets if demand cannot keep pace.

Oversupply, coupled with modestly growing demand, will put downwards pressure on the price of iron ore in the medium to long term. The Bureau of Resources and Energy Economics (BREE) recently forecasted the price of iron ore to average just US$91 per tonne by 2018.

Foolish takeaway

Investors contemplating buying stocks in some of our biggest iron ore miners should consider how long they expect Chinese demand and supply to keep pace with one another. If demand drops, so will the spot iron ore price and, eventually, share prices.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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