REUTERS

Monetary policy tightening in China, and Europe's inability to tackle its debt problems will continue to put downward pressure on iron ore prices in 2012, Kumba Iron Ore said on Wednesday.

Chief executive Chris Griffith said in the company's results report for the year ended December 31 that volatile market conditions were expected to persist during the first half of the year.

“Iron ore prices in the second half of 2012 will be largely dependent on the improvement in the overall global economy, and in particular, the monetary policy easing in China,” he said.

Kumba's headline earnings increased by 19 percent to R17 billion for the year. However, the company expected demand for steel to fall as measures to control inflation in emerging economies such as China started to have “the intended effect”.

The lack of co-ordinated policy response to tackle the European sovereign debt crisis was also affecting demand.

Despite the short-term macro-economic uncertainty, medium- to long-term prospects for demand remained “robust” as China continued to industrialise and urbanise.

Nevertheless, as China shifted from an investment intensive to consumption driven economy, the rate of growth for steel materials was expected to moderate to a more sustainable level, Kumba said.

In 2011 global steel production was up by six percent to 1.5bn tons, of which 683 million tons was produced in China, an increase of seven percent.

China's seaborne iron ore imports rose by eight percent to 654m tons.

Chinese crude steel production slowed considerably towards year end as a result of lower steel prices and slower steel demand, down seven percent in the second half of the year compared to the first half.

At the same time, Chinese seaborne imports of iron ore were up 11 percent in the second half compared to the first half.

In the short-term, iron ore supply was expected to remain tight due to bad weather in Brazil and Western Australia, and government moves in India to control exports, Kumba said.

Ongoing challenges producers faced in delivering new supply would lead to increasing capital intensity and would underpin a long-term pricing outlook.

Kumba said the combination of higher seaborne ore supplies and lower crude steel production resulted in a sharp fall in index prices in the final quarter of 2011, reducing the need for high-priced domestic ore in the second half of the year.

The global economic uncertainty in the second half of the year, coupled with a credit liquidity squeeze in China, particularly affecting downstream steel stocking by end users and the construction sector, caused steel prices to fall.

In turn, steel mills had cut production, slowed purchasing of raw materials, focused on fine ore and turned to sourcing lower grade ore to limit costs.

This had halted increases in the spot price of iron ore and curtailed the demand and pricing for high quality and lump ore.

By the end of the third quarter, steel production had started to slow noticeably as steel prices continued to weaken and market sentiment remained uncertain.

Steel demand and pricing in Europe had been subdued since April 2011, after concerns around the European sovereign debt crisis.

Japanese steel production and prices were initially affected by the earthquake and tsunami during the first quarter of 2011, but recovered during the third quarter.

However, as economic concerns increased this also weighed heavily on steel prices in Japan towards the end of the year.

As a result, European and Japanese steel producers started to implement production slowdowns in an attempt to stabilise steel markets. - Sapa