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20-07-2012 06:02:00

UPDATE: Iron Ore Price Lowest Since Nov As Chinese Demand Sags

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--Iron ore spot price drops to US$125.60 a ton

--The benchmark is at its lowest since early November; down 28% on-year

--Market weighed by soft demand from Chinese steelmakers

--Miners have been reporting record output, shipments

(Adds analyst comments in ninth, 11th and 13th-15th paragraphs; details on Australian mine output in 12th paragraph)

By Rhiannon Hoyle

SYDNEY--The price of iron ore has dropped to its lowest level in more than eight months as weak sentiment and ample inventories damp demand from Chinese steelmakers.

Industry participants cite subdued buying interest from Chinese steel mills and traders, with domestic steel prices having also slumped. Analysts say consumers of iron ore, a key ingredient in steel, are focused on their own profitability as the economy cools and, as such, have been unwilling to bid up the price for commodity.

The spot reference price for 62% Fe grade imports at China's Tianjin Port fell 2.1% Thursday to US$125.60 a dry metric ton, according to data from information provider The Steel Index. It is the benchmark's lowest level since Nov. 7, when the price was recorded at US$125.00 a ton. The price, which has fallen for the past seven week days, is down 28% on year.

Iron ore was the worst performing commodity in the week to July 18, as pressure in the market continued to build, Credit Suisse said in a research note. Prices slid as the value of China's steel futures dropped to a contract low.

"While in part the weakness in steel prices appears related to previous overproduction--inventories remain high--it is also a sign that final demand is yet to convincingly recover," Credit Suisse said.

Xinjiang Bayi Iron & Steel (600581.SH) this week said its profit fell more than 50% in the first six months of the year as the country's cooling economy weighs on demand for raw materials. The company is a subsidiary of the Baosteel Group, one of China's largest steel producers.

"Inventories at the ports also seem adequate for now, and steel mills probably have all the ore they need to get through to the end of the year," said UBS analyst Tom Price.

Weak iron ore prices could upset the balance of Australia's economy, which depends heavily on commodity exports. Resources account for more than 60% of exports and weaker demand from China, Australia's largest trading partner, will weigh on overall growth.

Australia's largest miners have this week reported record output and shipments of the commodity. Reports of expanding production here, though, may well have eased concerns among steelmakers over the medium-term supply outlook, "taking away some of the urgency to buy," said Mr. Price.

BHP Billiton Ltd. (BHP) reported a 12th consecutive annual production record from its iron ore mining operations in Western Australia, while Rio Tinto PLC (RIO) said its first-half output climbed 4% to a new record. Fortescue Metals Group Ltd. (FMG.AU) announced record quarterly iron ore shipments and a 41% jump in mined volumes.

Also this week, Brazilian mining company Vale SA (VALE), the world's largest producer of iron ore, said its second-quarter production had risen 15% on-quarter, as "the end of the rainy season contributed to the recovery" in output.

Brokers say there have been no signs of an improvement in sentiment among Chinese buyers after iron ore imports fell 9% on-month in June, to 58.3 million tons. Soft demand elsewhere, as the U.S. recovery loses steam and Europe's debt crisis drags on, is meanwhile adding to an oversupply in the market.

"With iron ore, in addition to kick-on from the steel market, traders have again become concerned about the prospect of cargoes initially destined for Europe being diverted to China," Credit Suisse said.

Market analysts say iron ore prices will likely remain under pressure until later in the year, and may require considerable improvements in China's construction and manufacturing sectors before staging a recovery.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

July 20, 2012 00:02 ET (04:02 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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