Iron ore, trading near 16-month highs, may slump 54 per cent to the lowest level since 2009 as China boosts production and global supply climbs, said UBS.

Rates may tumble to $70 a ton in the three months ending September after trading between $130 and $160 through June, Sydney-based commodity analyst Tom Price said today. China is the world’s biggest importer.

Iron ore has surged 75 per cent from a near three-year low in September as China’s growth rebounded from a seven-quarter slowdown. That may prompt an increase in Chinese output and idled mines with capacity of 100 million tons a year are set to return to the market from March, according to Macquarie Group on February 22. Global seaborne supplies will climb 9.1 per cent this year, Morgan Stanley estimates.

“We expect a big correction in the third quarter,” said Price. “We see a big lift in supply.” Ore with 62 per cent content delivered to the port of Tianjin in China cost $151.90 a dry ton yesterday, according to The Steel Index Ltd. Rates rose to $158.90 on Feb. 20, the highest since October 2011.

While Price joins analysts from Westpac to Deutsche Bank in predicting cheaper prices in the second half, his estimate is lower than most. Westpac senior economist Justin Smirk and Bank of America expect $110 by yearend.

Rates may jump above $160 in the short term amid lower supplies from India and as the cyclone season in Australia threatens shipments, said Price. March ore swaps rose 1.8 per cent to $150.06 yesterday, snapping seven daily losses, data from SGX AsiaClear show, as a severe tropical cyclone neared Port Hedland, the world’s largest bulk export facility.

Cyclone Rusty

Rusty, a category 3 storm, is 170 kilometers (106 miles) northeast of Port Hedland, said the Bureau of Meteorology. The port, which ships ore from BHP Billiton and Fortescue Metals, has closed and Rio Tinto Group’s Dampier and Cape Lambert iron ore shipping facilities are shut.

Australia is set to deliver about 80 per cent of total new seaborne supply this year, most of it in the second half, UBS analysts including Price said in a January 31 report. That will coincide at a time when China has “sufficient” ore and as steel production declines in the second half, they said.

“The trade will remain pretty tight generally all the way through to June or July and then it starts to fall over going into August or September,” said Price. Iron ore slumped 22 per cent in the third quarter of 2012. Global seaborne supply will outpace demand by 20 million tons in 2013 from a 37 million ton deficit last year, says Goldman Sachs.

Iron ore is measured in dry tons, or metric tons less moisture. At Tianjin port moisture can account for 8 per cent to 10 per cent of the ore’s weight.

Bloomberg