Iron ore at risk of further losses as price tumbles

18 September 2017

Iron ore is facing renewed pressure and risks sliding back into the $60s, as China’s economy shows signs of cooling and global mine supply increases, while planned steel capacity cuts in the world’s biggest consumer this winter could further cut demand.

Ore with 62% content in Qingdao fell 2.5% to $72.13 a dry metric tonne on Friday, the lowest level since July 28, extending the previous day’s 3.4% loss, which was the most since May, according to Metal Bulletin.

The commodity, which almost hit $80 in August, posted the first back-to-back weekly decline since June. The steel-making raw material is in retreat after a slew of negative outlooks, with Barclays Plc saying the commodity is “living on borrowed time.”

Industrial output and retail reports from China this week suggested an unexpectedly slower pace of growth. While capacity cuts to curb pollution in Asia’s top economy are set to hurt consumption, a further expansion in mine supplies from Brazil and Australia also threatens prices.

“A combination of softening demand growth from China and the outlook for increased supply create downside risk for the spot iron ore price,” said Ric Spooner, chief market analyst at CMC Markets in Sydney. “The chances are we’ll see the spot price retreat to the $60s.” Miners’ shares dropped with ore on Friday. Rio Tinto Group and BHP Billiton Ltd closed 2.3% lower in Sydney, while Fortescue Metals Group was down 4.5% on news that chief executive officer Nev Power was stepping down.

The trio are Australia’s top exporters. Much of iron ore’s recent strength has been spurred by strong demand within China, but that’s about to change, according to a September 13 report from Barclays, which said its economists see an “impending end” to macroeconomic support. While the bank didn’t give a price forecast, it has said previously it sees an average of $50 by the fourth quarter.

Data on Thursday showed Chinese retail sales, industrial production and fixed-asset investment slowed last month after a lacklustre July, suggesting that efforts to rein in credit expansion and reduce excess capacity are hitting home. China’s home sales grew at the slowest pace in almost three years.

As an environmental campaign intensifies, steel production, which notched a fresh monthly record in August, may drop in coming months. Hebei province, the centre of China’s mammoth steel industry, has plans to allow for output cuts of as much as 50% to reduce pollution.

Citigroup Inc has estimated daily production could shrink 8% because of the crackdown.
“Steel plant shutdowns will reduce demand for iron ore,” Fan Lu, an analyst at Sinosteel Futures Co, said on Friday, adding there’ll also be a greater supply of ore arriving in China. “The commodity is poised to remain in a downtrend.”