Rate-Rise Worries Add to Iron-Ore, Steel Woes

24 May 2016

China steel-rebar and iron-ore futures fell sharply Monday on expectations of a U.S. interest-rate increase and fading domestic demand, continuing a one-month slide.

Both fell by their daily limit in afternoon trading before recovering some ground late in the day. Steel rebar settled down 5.2% at 1,947 yuan ($298) a metric ton; iron ore, down 5% at 353.5 yuan ($54) a ton.

Each is down nearly 30% from a late-April peak, a drop that has shaken markets well beyond China, as its futures prices have become a global benchmark for spot market rates. The effects are felt by companies from global miners such as BHP and Rio Tinto—whose shares were down 2.6% and 2.3%, respectively—to bulk users of steel such as car and aircraft makers.

Mitchell Hugers, commodities strategist at BMI Research, sees iron or falling to $40 to $50 a ton in coming months as declining demand from steel producers and ample Chinese inventories weigh on the market.

At their peak, futures prices were up more than 50% for the year, pushed by rising demand from Chinese steel mills grew and a growing market frenzy—trading volume in April was twice that of February. But the rally started to come apart in late April as market regulators said they would clamp down on speculative trading and China started tightening the easy credit flows that had encouraged a rush into commodities by local funds.

The latest selloff came as concerns grew that the U.S. Federal Reserve will raise interest rates next month, driving up the value of the dollar. That could raise the cost in China of imported iron ore, priced internationally in dollars, and so put the squeeze on Chinese steel mills. China, which accounts for around half of global steel output, is the world’s largest consumer of iron ore, steel’s basic ingredient.

The rising expectation of an increase in U.S. rates has had some psychological impact, said Fan Qingtian, an analyst at Nanhua Futures, adding the price slump looks set to deepen.

The profitability of Chinese steel mills has taken a hit along with iron-ore and steel prices since the fading of the rally that had encouraged them to resume stalled production, mostly after February’s Lunar New Year holiday.

Chinese government officials have said there has been no fundamental change in steel supply and demand. They have also said the country intends to pursue a program for gradual reduction of steel capacity.

Faint signs of a pickup in China’s housing sector and hopes of economic stimulus from the government, which had cheered domestic steelmakers, have since faded.


Source : wsj.com