Iron ore is heading for its fourth consecutive week of falling prices as fears of faltering demand and tougher seasonal pollution controls start to bite.
- Iron ore prices have fallen more than 10pc recently and are heading below $US60 a tonne next year according to Westpac
- Forward looking indicators, such a rapidly cooling property market and tighter credit, point to further weakness
- A seasonal crackdown on air pollution from steel makers will further decrease demand in coming months
Having peaked near $US80 a tonne last month, prices have tumbled more than 10 per cent since.
There appears to be little hope of any immediate change in sentiment with forward looking indicators all looking weak.
The principal issue is the expectation steel demand will fall as authorities move to tighten credit to rein in debt and speculative excesses.
Broad-based economic data in August revealed industrial production, fixed asset investment — a proxy for infrastructure and property construction — and retail sales all pointed to a slowing economy, following on from a equally subdued reading in July.
As well, August credit figures pointed to China's central bank slowing the injection of money into the economy over the past two quarters, tightening overall liquidity in the economy.
Property market cooling
That tightness has flowed through to a rapidly cooling property market.
Last month new house prices in tier one cities grew at an annualised pace of less than 5 per cent, compared to a peak of more than 30 per cent early last year.
Significantly, prices in Shenzhen are now 2 per cent down over the year, while Shanghai is up just 3 per cent.
The credit-fuelled construction boom has been a significant driver in the demand for steel and its raw materials — iron ore and coking coal.
Westpac's Elliot Clarke said the actions by authorities are clearly continuing to have a significant effect on the property market.
"The August 70-city property price data was telling, being the first time that annual growth in tier one new home prices has fallen below that of tiers two and three," Mr Clarke said.
"The reaction of developers to continued price gains remains muted. The pace of growth in sales and starts continues to trend down."
Mr Clarke said fixed asset investment was likely to continue to slow through next year.
"The residential construction sector in China is maturing and under strict regulation. Future growth cycles will be muted relative to history."
Steel production facing big winter cut
The more immediate impact on iron ore prices is likely to come from the seasonal crackdown on air pollution caused by streel production.
The state-controlled Xiahua news agency has reported that key steel making areas — such as Hebei province, outside Beijing, and the port city of Tianjin — have been ordered to cut steel production by up to 50 per cent by mid-November.
Xiahua said authorities were anxious to pull back on coal-based air pollution that rises by 30 per cent as winter approaches and central heating is switched on.
Much of the pull back in production has been due to the shut down of illegal electric induction furnaces.
However, this is not necessarily bad news for big iron ore exporters such as BHP, Rio Tinto and Fortescue as the older furnaces tend to use lower grade ores and scrap steel as their feedstock.
Nonetheless, this week's significant step down in prices has taken its toll on the big miners, with their share prices down around 5 to 8 per cent in recent days.
Westpac forecasts that iron ore will be sitting at around current levels at the end of the year, but will be well below $US60 a tonne this time next year.