After a horrible May, the iron ore sell off gathered steam on Wednesday, sending prices tumbling back to a fresh three-month lows.
According to Metal Bulletin, the spot price for benchmark 62% fines fell by 3.49%, or $1.75, to $48.40 a tonne, leaving it at the lowest level seen since February 26.
It has now lost 31.3% since April 21, trimming its year to date gain to just 11.1%.
Given the importance of the iron ore price on Australia’s budgetary position, it noteworthy that the current price is now $10 below forecasts offered by treasury in May on a free on board basis.
Based on treasury modelling, this would detract $6.1 billion from nominal Australian GDP over the 2016/17 financial year should the price remain around these levels.
According to Metal Bulletin, the weakness coincided with the release of disappointing economic data relating to activity levels across China’s steel sector in May.
“China’s steel purchasing managers’ index (PMI) fell in May after five months of gains. The index stood at 50.9 points for last month, down 6.4 points from April, according to data released by the China Federation of Logistics & Purchasing (CFLP),” said analysts at Metal Bulletin.
Like the better-known manufacturing PMI, the steel industry PMI measures changes in activity levels from one month to the next. A figure above 50 points to expanding activity levels while a sub-50 reading indicates that activity levels are contracting. In other words, the higher the number the better.
At 50.9, activity levels still improved across the sector in May, although at a far slower pace than April.
This fits with the view presented by some commentators that China’s infrastructure surge that started in late February will unwind in the second half of the year
Providing no indication whether the losses in the spot price will continue on Thursday, Chinese futures markets did little in overnight trade, closing the session up 0.29% at 345.5 yuan.
Trade will resume at 11am AEST.