Iron ore to fall to US$120 a tonne

While the resilience of iron ore has taken many investors and analysts by surprise in recent months, commodity analysts are saying that prices will drop in 2014 as a decline in demand from the world’s largest steel producer coincides with an increase in supply from major iron ore miners.

Iron ore, a key steelmaking ingredient, is currently priced at US$139.40 per tonne, up from an average of US$132.60 per tonne in October and well above its June lows. China’s imports of the commodity hit new records in July, September and November – the latest being a massive 77.8 million tonnes – indicating an upwards trend in demand.

However, according to NAB analysts the rise in prices reflected a brief period of restocking by Chinese mills for steel production. As reported by The Australian Financial Review, China’s proportion of steel output in comparison to the rest of the world fell to 48.5% in October from 49.4% in September. A crackdown by Chinese authorities on its steel-making capacity would affect demand.

Whilst Australia’s major iron ore miners, including BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) – along with other heavyweights around the world including Brazil’s Vale – ramp up their production levels, the additional supply coupled with decreased demand would push prices downwards.

By the end of 2014, both NAB and CIMB believe the price will have fallen to around US$120 per tonne.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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