Iron Ore-Shanghai rebar retreats on gloomy demand outlook

Thu Jun 2, 2011 4:36am GMT

* Key iron ore indexes at two-month lows
* Ore prices may drop further, tight supplies to support
By Manolo Serapio Jr

SINGAPORE, June 2 (Reuters) - Chinese rebar steel futures edged lower on Thursday amid a murky outlook for steel demand, putting downward pressure on iron ore prices already trading at more than two-month lows.

The most active October rebar on the Shanghai Futures Exchange dropped 0.5 percent to 4,844 yuan per tonne by the midday break, after earlier hitting a near one-week low of 4,839 yuan.

"Steel mills continue to face difficulty getting loans with the tight credit environment and purchase orders for steel products are not that much," said an iron ore trader in China's eastern Shandong province.

The weak steel demand outlook in top consumer China has weighed on prices of steelmaking ingredient iron ore, with some traders seeing more room for prices to drop.

Indian ore with 63.5/63 percent iron content was quoted at $175-$178 a tonne, including freight, on Thursday, down from $176-$179 on Wednesday, Chinese consultancy Umetal said.

"The market's blurred at the moment. Many people believe prices have room to go down further, but personally, I think the current level at $175-$178 is acceptable for steel mills. I think we're at the bottom," said the Shandong-based trader.

Iron ore price indexes, which global miners use in setting quarterly contract rates, mostly dropped to fresh two-month lows on Wednesday.

The Steel Index's 62 percent iron ore benchmark .IO62-CNI=SI dropped $1 to $168.80 a tonne, its lowest since March 29. A similar index by Metal Bulletin .IO62-CNO=MB eased 10 cents to $170.62, a level not seen since March 30.

Platts 62 percent iron ore index IODBZ00-PLT was steady at $171.

Spot iron ore prices have dropped around 11 percent since hitting record highs above $190 a tonne in mid-February, and analysts see more declines ahead.

"We expect increasing supply from Brazil, weakening global steel demand, and the risk of iron ore destocking in China to put downward pressure on iron ore prices in the next three months," Standard Chartered commodity analyst Judy Zhu said in a recent note.

"However, the downside should be limited, as global supply of iron ore will remain generally tight, with Indian exports likely to disappoint the market between June and October."

Zhu said tight supplies should help spot prices of 62-percent grade iron ore to stay between $150-$180 a tonne in the third quarter, before rebounding to an average of $182 in the last quarter of 2011.

Global miners are likely to cut contract prices by around 1 percent in the third quarter following a drop in the average index price from a record high in the second quarter, Reuters calculations showed.

Prices for nearby forward swaps <0#SGXIOS:> slipped on Wednesday after steep gains in the previous session, dashing hopes of a turnaround in investor sentiment soon.

The June contract fell $1.25 to $169.75 a tonne, July dipped 87 cents to $168.63 and August gave up 95 cents to $167.38.

Global miner BHP Billiton suffered a train derailment last weekend at one of its key iron ore routes in Australia's Pilbara region, which may impact its deliveries for the quarter, the Australian newspaper said on Thursday.

Operations resumed on Monday evening but BHP would not estimate the possible impact of the derailment on its sales. (Reporting by Manolo Serapio Jr.; Editing by Michael Urquhart, sourced Thomson Reuters)