Steel and iron ore hit by China sell-off

18 November 2015

Concern about the strength of demand in China, the world’s largest consumer of commodities, has pushed steel prices to a record low and triggered selling of other raw materials.

As steel rebar prices dropped to a record low in Shanghai, copper continued its swoon, falling to a fresh six-year low. Iron ore, the main ingredient in steelmaking, hit its lowest level since August, approaching a level where more miners may choose — or be forced — to cut output.

The falls are a further indication that prices have not found a floor as growth in China continues to slow. That could put pressure on the largest miners as falling prices cut deeper into profit margins. Some investors fear that weak commodity prices are signalling something that is not appearing in official economic data and stock market valuations.

In copper, the “perceived demand floor has evaporated”, HSBC analysts said in a research note. The bank estimates Chinese copper demand growth at 0.8 per cent to 1 per cent over the next two years.

Markets are also struggling to digest excess capacity, especially in China. In the case of aluminium and steel, metal has made its way out into global markets.

Aluminium has fallen to a six-year low this week and prices slipped below Rmb10,000 a tonne in China, a psychologically significant level that led to further selling.

More than half of China’s capacity is making losses at current prices and that is likely to lead to cuts, according to Mo Xinda, an analyst at China Nonferrous Metals Industry Association.

The country’s aluminium consumption will maintain a steady growth over the next four to five years and will not peak until after 2020, according to their forecasts.

Steel rebar futures hit a record low of Rmb1,745 a tonne on the Shanghai Futures Exchange, down more than 30 per cent this year.

Weak domestic demand for steel has hit prices for iron ore, which have declined 15 per cent in the past month. China faces growing opposition to its exports, which have been called “dumping” by steel industry participants in Europe and North America. Since peaking in 2011 the iron ore price has fallen 75 per cent as more mines have brought on supply.

“The scale of the oversupply in this market is such that small supply disruptions are only creating shortlived rallies, if at all,” said Georgi Slavov, head of research at Marex Spectron, a broker.

“The floor of this market is in the hands of the top five mining companies. We will need to see more cuts before there is a sustained recovery.”

The benchmark iron ore price fell 3 per cent towards $45 a tonne on Tuesday, approaching the all-time low of $44.10 hit in August.

“The seaborne market remains fragile, with little buying interest in the Chinese market,” said analysts at ANZ. “Weak demand is reflected in the Baltic Dry shipping index sliding to a fresh eight-month low. Weak steel prices are impacting the credit profile of steel companies. Fitch recently cut the outlook of ArcelorMittal from stable to negative.”