Iron ore succumbs to bear market and may extend its slump
26 September 2017
Iron ore has slumped back into a bear market after posting the biggest weekly loss in 16 months amid concern that record demand in China may ease off as mills enact winter output cuts just as data from the top user signals that the economy may be cooling.
Losses have probably been driven by “the realisation that if, as planned, large amounts of steel capacity are taken offline during the winter months, this will mean lower demand for iron ore,” Caroline Bain, chief commodities economist at Capital Economics Ltd, said by email. “August activity and spending data suggested that the Chinese economy is starting to slow.”
Spot ore with 62% content in Qingdao slipped 0.8% to $63.06 a dry metric tonne yesterday, after retreating 12% last week, according to Metal Bulletin. Prices have lost more than 20% since peaking near $80 in August, meeting the common definition of a bear market. Lower-grade 58% ore, which trades at a discount, has sunk into the $30s.
Iron ore is in retreat after a tumultuous year that’s seen the commodity surge in February and again in June-to-August only for gains to be rolled back. While Chinese steel output has been running at a record pace, aiding iron ore, policy makers plan to order production cuts over winter to curb pollution.
Last week, Australia’s central bank predicted weaker iron prices, flagging risks including rising supplies as well as concern that China may be nearing peak steel. “We expect the price of iron ore to fall further and to average just $55 a ton in the fourth quarter,” said Bain. Capital Economics placed first in a Bloomberg ranking of iron ore forecasters in the second quarter. “Much will depend on whether the capacity closures take place on the scale that is planned.”
There are signs of cutbacks before winter starts. The steel-making hub of Tangshan city plans to halve output of pellet and sintering plants – both used to make steel – from yesterday as part of an “emergency measure” to reduce pollution, the environmental bureau said. The duration of the cuts will be notified by the municipal government at a later date.
The planned winter cuts could reduce steel output by up to 30mn tonnes and iron consumption by 50mn, according to Ian Roper, head of Shanghai Metals Market’s international division. It makes for a “risky picture” for prices given ore supply is always seasonally stronger in the fourth quarter, he said.
Steel prices in China, which accounts for half of worldwide production, are losing ground after hitting multiyear highs, paring mills’ profitability and undercutting iron ore demand.
In Shanghai, futures for reinforcement bar fell 6.6% last week, while the contract for hot-rolled coil dropped 7.4%, the biggest loss since May. More iron ore supply is on the way. Shipments from the top producers are estimated at 314.9mn tonnes this quarter, up 5.3% on-year, according to Sanford C Bernstein & Co, citing vessel-tracking data. Last week, Vale SA said its giant S11D mine will hit 25% of capacity by year-end.
Iron ore futures in Asia fluctuated on yesterday. In Singapore, the SGX AsiaClear contract initially fell as much 2% to $61.75 a tonne, then rebounded to trade 1% higher. In China, the most-active price on the Dalian Commodity Exchange also swung from a loss to a gain.