Oversupply and a lack of demand growth has led some market analysts to speculate that iron ore prices will never recover to former levels, and warn of a divergence in different base metals going forward.
The price of iron ore is now just over $47 a ton, according to The Steel Index (TSI), which measures a benchmark of 62-percent ore. This is its lowest level since the TSI started compiling spot market prices in 2008, according to Reuters.
On Monday, analysts at Citi slashed their forecasts for the price of the metal and now expect iron ore to average $45 a ton in 2015 and $40 a ton in 2016. These are downgrades of 23 percent and 36.6 percent, respectively.
“We believe the upside in the sector is now capped, however the downside is being protected by dividend yield. We think it is going to be a tough 1-2 years for the mining sector until we clear surplus capacity in the bulk commodity prices,” Heath Jansen, metals and mining analyst at Citi, said in a note Monday morning.
Another analyst, Colin Hamilton, head of global commodities research at Macquarie, explained that iron prices needed to fall in lower in the short term to clear an oversupply that isn’t prevalent in other commodity markets.
“The real challenge for this market is that it still has lots of supply coming,” Hamilton, who has also downgraded is forecasts for iron ore prices, told CNBC.
Caroline Bain, senior commodities economist at Capital Economics, highlighted in a note last week that iron ore output grew by 9 percent in 2014, while copper mine supply grew by just over 1 percent.
She added that low-cost iron ore producers in Australia and Brazil were continuing to ramp up output despite the fall in prices, and said she believed this would boost iron ore supply again this year.
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