China steel selloff fuels iron ore slide, but fundamentals seen intact

23 August 2017

Steel and iron ore futures in China fell more than 5 percent on Wednesday as a selloff in steel dragged down prices of the steelmaking raw material, cutting short a rally that lifted iron ore to five-month highs this week.

But traders say the losses in steel prices may be fleeting as underlying demand in China, the world's top producer, remains strong and supply tight amid Beijing's reforms to curb overcapacity.

The most-active rebar on the Shanghai Futures Exchange was down 5.4 percent at 3,722 yuan ($559) a tonne by 0309 GMT. The construction steel product, which touched a 4-1/2-year high of 4,016 yuan on Aug. 10, touched a session low of 3,710 yuan.

Iron ore on the Dalian Commodity Exchange had slid 5.3 percent to 569.50 yuan per tonne, after peaking at 609.50 yuan on Tuesday, its strongest since March 16.

"Fundamentally, the physical steel market still looks healthy with supply-side reforms restricting supply and demand remains firm," said a Shanghai-based trader.

Cooler weather in China should spur construction activity and boost steel consumption, he said, adding the selloff in futures showed investors cashing in on recent sharp gains.

But the outlook for iron ore prices isn't as bright as steel, he said, particularly for lower-grade material.

"High-grade iron ore is in big demand because all mills are trying to increase productivity. But for medium to low-grade iron ore, there's basically no demand," he said.

This has widened the gap between prices of high-grade and low-grade iron ore to almost $28 a tonne this week, the widest in five months.

Iron ore with 62-percent iron content .IO62-CNO=MB, considered high grade, stood at $79.65 a tonne on Tuesday, little changed from the previous day, according to Metal Bulletin. Lower grade iron ore, with 58-percent iron, .IO58-CNO=MB was at $53.33 per tonne.