Iron ore slips close to $US55 a tonne threshold

The iron ore price has weakened after ratings agency warnings the commodity is likely to fall further.

The iron ore price has weakened to a whisker above the $US55 a tonne threshold, after ratings agency Standard and Poor’s warned the commodity is likely to fall further and dampen government revenue.

Iron ore lost 1.1 per cent to $US55.20 overnight, according to The Steel Index, from $US55.80 the day before.

The commodity has now spent four days above government estimates of $US55 a tonne since mid-May.

Australian budget documents released two months ago warn that if the price of the key export falls $US10, tax receipts could be reduced by $1.4 billion.

S & P yesterday placed Australia’s AAA sovereign debt rating on negative watch, citing ongoing budget deficits and uncertainty over the result of last week’s federal election.

The ratings agency takes the view that iron ore could be nearly $US20 a tonne lower than government forecasts over the next 18 months. Such a fall could weigh heavily on federal revenues.

The agency’s bearish forecast follows a growing chorus of banks predicting the commodity will decline from recent levels in the low to mid $US50s as supply outstrips demand.

Macquarie is calling a bottom around $US47 in 2018, Citi predicts an average of $US42 in 2017 and NAB tips a fall to $US40 next year. Clarksons this week forecast “meaningfully” lower prices in the second half of 2016 than the first half.

Despite worries about the commodity’s fundamentals, it has remained relatively resilient over much of the year so far due to seasonal restocking from Chinese steel mills and a wave of speculative trade that Chinese exchanges have since moved to stamp out.

In London trade, BHP Billiton rose 1 per cent, while rival Rio Tinto added 0.4 per cent.