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China's iron ore appetite seen slumping by a fifth in H2

China's iron ore appetite seen slumping by a fifth in H2

Beijing: China's appetite for overseas iron ore may drop by a fifth in the second half after record buys in the first half, as high spot prices encourage the reopening of idled domestic mines, according to a Reuters poll.

The world's top steelmaker will import 236 million tonnes in the second half, an average of eight analysts polled showed, down from 297 million tonnes in the first half, with inventories twice as high as normal also weighing on purchases.

Iron ore spot prices will rise to a median $90 a tonne delivered China by the end of this year, from around $70 at the end of the first half, as demand from outside China finally improves, according to a median of five analysts.

"Iron ore demand outside China will recover from very depressed levels in the fourth quarter and first half of next year, as destocking by steelmakers ends and as they ramp up production," said Macquarie analyst Jim Lennon.

"Rising spot prices will induce reopening of domestic iron ore mines, reducing slightly the import requirements and placing a cap on spot prices in late 2009/early 2010 at around $90-100 a tonne including cost and freight to China."

Spot iron ore prices are trading at an eight-month high, with ore with iron content of 62 percent delivered China at $89.5 a tonne this week, according to the Steel Index, around 15 percent above the 2009 contract benchmark miners agreed with Japanese and South Korean steel mills.

Although most analysts agree prices would stay firm at least until the end of the year, they are sharply divided whether the market would sustain its strength into 2010.

Contract prices, which dropped 33 percent in the current fiscal year but are still at their second-highest level ever, are set to remain unchanged at around $61 a tonne free on board next year, according to a median forecast of seven analysts.

But forecasts ranged from a 16 percent drop to a 10 percent rise.

The system of setting annual contract prices could see the biggest change in its 40-year history as China refuses to officially endorse the benchmark deal signed by its global rivals.

Another imponderable is China's idled domestic mines, many of which are high-cost and located far inland. Domestic ore production, which normally meets roughly 60 percent of demand, has started picking up, rising by 27 percent in June to the second highest ever.

"There is up to 200 million tonnes of idled high cost Chinese iron ore mining capacity that could come online to meet demand when the market recovers and prices increase. We believe this idle capacity limits the upside potential for iron ore prices," Barclays said in a recent report.

But easing freight rates could help support iron ore prices on a delivered basis and keep China's interest in imported ores high, keeping the cost of moving low-grade ores from China's inland to coastal steel mills prohibitive. [27/07/09]