Iron ore is getting poleaxed

Photo: Robert Cianflone/Getty Images.

Iron ore’s latest rally has hit the skids with Chinese futures tumbling over 6% on Wednesday, more than doubling the losses recorded overnight.

It’s ugly, as seen in the scoreboard below as at the mid-session break.

SHFE Rebar ¥3,216 , -3.13%
DCE Iron Ore ¥456.50 , -6.74%
DCE Coking Coal ¥1,039.50 , -1.66%
DCE Coke ¥1,535.00 , -2.26%

These are big falls, not just for iron ore but rebar as well, continuing the symbiotic relationship between the two that is now well entrenched.

Coking coal and coke futures are also coming under pressure.

While most contracts finished overnight trade nursing modest losses, there’s clearly been a deterioration in sentiment towards the steel sector, contributing to the large declines.

As for what’s driving it, it’s anyone’s guess.

It’s likely that record-high iron ore port inventories in China will be one factor cited, spurning concern that the market is oversupplied.

This, after all, isn’t “new” news — it’s been known for some time now.

And with steel inventories in China currently well below normal levels, even with record-breaking Chinese crude steel production in April, it’s suggests that today’s move is likely being driven by other factors.

While purely speculation as to whether it’s been a factor or not, the latest plunge coincides with the decision from ratings agency Moody’s to downgrade China’s sovereign credit rating one notch to A1 from Aa3, citing concerns over mounting debt levels.

Moody’s said it “expects that economy-wide leverage will increase further over the coming years”.

“The planned reform program is likely to slow, but not prevent, the rise in leverage,” it said.

“The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus. Such stimulus will contribute to rising debt across the economy as a whole.”

That’s impacted other Chinese markets which have sold off in response, and may contribute to renewed pressure on capital outflows.

Whether that, other factors or simply speculators rushing for the exits after recent strong gains is yet to be determined.

Dalian September 2017 Iron Ore Contract. 5-Minute Chart. Source: Thomson Reuters

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