Rebecca Keenan and Elisabeth Behrmann Sydney and Perth

Short-term fluctuations in iron ore prices would continue after a credit squeeze in China and large stockpiles plunged the commodity into a bear market, Rio Tinto said yesterday.

“There will be short-term volatility,” Andrew Harding, the chief executive of Rio Tinto’s most profitable unit, said at a conference in Perth. “We continue to see an attractive longer-term demand for iron ore, driven particularly by China.”

Rio Tinto is the second-biggest producer of iron ore.

Iron ore prices have extended their declines this week amid concern that demand in China is slowing just as rising output signals a global glut. Harding said the Chinese government’s credit squeeze and high stockpiles were driving the rapid change of sentiment.

Closely held steel mills in China were “struggling to get funding at the moment”, Joel Crane, a Melbourne-based commodity analyst with Morgan Stanley Australia, said. “So they will be refusing both contracted and spot iron ore, and that has led to panic selling.”

Harding said: “We are looking at a credit squeeze [at] the same time as high stockpile levels in China. Sentiment has caused the rapid change.”

Jimmy Wilson, the head of iron ore at BHP Billiton, said yesterday: “You have this credit issue in China; you have reasonably high iron ore stocks; traders have a view that prices are going to go down, so they do everything they can to hold back. That’s why these fluctuations tend to amplify.”

Chinese Premier Li Keqiang’s strategy of driving up interest rates to reduce leverage is exposing a shadow banking underbelly in that country as companies struggle to repay loans from trusts, asset managers and commodity-funding businesses. About 40 percent of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates.

BHP Billiton and Rio Tinto predict lower prices this year after producers in Australia and Brazil spent billions of dollars to expand output.

Banks from Citigroup to UBS predict a global surplus, and Goldman Sachs lists iron ore among its least preferred commodities for this year. “The longer term is still intact,” Harding said. – Bloomberg