Gloomy iron ore demand here to stay

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Sydney: Rio Tinto gave a gloomy assessment of global commodity markets Tuesday, saying there is unlikely to be much of a rebound this year and warning the downturn will continue to hit its profits, Reuters reported. On the same day a research report by CLSA predicted contract iron ore prices to fall 30% this year on weak demand.
The downbeat outlook reinforces Rio Tinto's message that it needs to proceed with a planned US$19.5 billion deal with Aluminum Corp. of China, or Chinalco, to ease its US$38.7 billion debt burden.
Australian Government approval looms as the key hurdle to that Chinalco deal, and Australian Trade Minister Simon Crean said Tuesday a decision on the deal will be made in the national interest and independently of negotiations with China on a free trade deal.
In its annual report, Rio Tinto said economic activity is continuing to decline and forward indicators suggest any recovery is unlikely to begin until the second half of the year.
"Prices seem unlikely to be able to stage much of a rebound during 2009," the miner said, tipping Chinese metals demand growing only at a single-digit rate in 2009.
That compares with growth of more than 20% in recent years, and won't be enough to offset a much bigger decline in consumption in other markets, Rio Tinto said.
The miner warned that the tough conditions will continue to hit its bottom line and that slower growth in China could mean lower iron ore prices and further weakening in iron ore demand.
"The recent significant reduction in commodity prices and global demand for the group's products has had, and are expected to continue to have, a material adverse impact on the group's business, financial condition and results of operations," Rio Tinto said.
Meanwhile, CLSA Asia-Pacific Markets said in a research note on Tuesday it now expects contract iron ore prices to fall 30 percent this year, more than the 20 percent fall it was previously forecasting.
The firm said there was little incentive for iron ore producers to settle benchmark prices in a rush as there was an expectation that Chinese demand would normalise as government stimulus measures gained traction.
CLSA noted iron ore spot prices in China had fallen 21 percent to $67.50 per tonne from $85 per tonne in the past month as stockpiles at Chinese ports increased.
"In the near term we believe the risk to iron ore spot prices in China remains to the downside and that Australian iron ore producers will continue to defer settlement until there is increased demand visibility," the firm said.  [17/03/09]