The only thing preventing Chinese iron ore futures from falling further today is they're not allowed to

Greg Baker/AFP/Getty Images
  • Chinese iron ore futures are down 6% on Monday, adding to losses in recent sessions.
  • The only thing preventing further declines is that market rules prevent it.
  • Reports of Chinese steel mills selling down existing inventories, at a time when profit margins are extremely thin, appears to be behind the move.
  • Chinese steel and coking coal futures are also getting hosed on Monday, pointing to the likelihood of further weakness in spot and physical markets.

It wasn’t all that long ago that iron ore prices were scaling fresh multi-month or multi-year peaks, helped by optimism over the outlook for demand at a time when profit margins at Chinese steel mills were elevated.

However, that’s all changed in recent days with prices tumbling sharply, including in Chinese futures.

Well, based on the price action seen in futures on Monday, the slide in iron ore prices may be about to get significantly larger.

The January 2019 contract currently sits limit-down 5.91% at 477.5 yuan, the lowest level since late August.

At this point, the only thing preventing even larger losses today is that market rules prevent it.

Thomson ReutersDalian January 2019 Iron ore Futures Contract. 1-Minute Chart.

Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, says recent falls may have been caused by reports that Chinese steel mills are offloading existing inventories.

“[There are] reports that Chinese steelmakers were offloading inventories,” he says, referring to the recent seen in spot and futures markets on Friday.

“Prices are falling as declining steel margins dent expectations of Chinese steel production.”

Put bluntly, if mills aren’t likely to make any money, they’re unlikely to maintain current production levels, especially at a time when seasonal demand for steel is weak over the northern hemisphere winter.

Like iron ore, that’s also been reelected in coking coal and coke futures on Monday with the most actively-traded contracts sitting at 1,289 and 2,137 yuan respectively, down from 1,321.5 and 2,170 yuan on Friday evening.

Steel futures are also under pressure with rebar and hot-rolled coil prices sitting at 3,575 and 3,397 yuan respectively, off Friday’s night session close of 3,627 and 3,465 yuan.

For the moment, pessimism across the sector is extremely elevated, pointing to the likelihood of further losses in physical markets in the absence of an unexpected turnaround in sentiment in the latter parts of the session.

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