Australia's mining sector appears to have rejoiced too soon in the partial recovery of iron ore price in the global market. With the commodity reaching $138.50 at the start of 2013 from a low of $89 a tonne in 2012, miners such as Rio Tinto had planned production boosts.
However, analysts' projection indicated lower iron prices in the near future. For 2013, the industry observers forecast average price of the key steelmaking ingredient at $130 per tonne, which would go down further to $90 in 2015.
Morning Star analyst Mathew Hodge explained the lower outlook to anticipated slower growth of steel demand in China, the largest consumer of iron ore. He said the recent boost in iron ore prices is due to higher Chinese infrastructure spending which increased steel production but as supply eventually overtake demand, prices of the commodity would go down.
For 2013, Beijing will spend 650 billion yuan on railway construction, higher than the 631 billion yuan it spent in 2012.
However, Mr Hodge added the lower iron ore prices would not impact much the low-cost and giant miners such as Rio and BHP Billiton since these companies would like continue to earn attractive profits, but would mostly affect higher-cost miners with weaker balance sheets.
Ren Xinlei, analyst at Luzheng Futures, pointed to the slowdown of construction activity with the approach of the Chinese Lunar New Year holiday will also reduce demand for steel.
Ahead of the week-long Chinese holiday, steel reinforcement-bar futures in China went down to $638 a metric tonne on the Shanghai Futures Exchange.
Chinese New Year officially begins Feb 10 and lasts 15 days, although the festive mood goes past the Lantern Festival on Feb 24. China, Hong Kong, Macau and South Korea have three public holidays to mark the Chinese New Year, which has the following song for this year's festivities.