Iron ore is under pressure as steel futures plunge

Dean Mouhtaropoulos/Getty ImagesA very dramatic fall.
  • Iron ore spot markets fell on Tuesday. However, they managed to avoid the worst of the carnage seen in Chinese steel futures during the session.
  • Reports that Chinese regulators will allow local officials to set production curbs on heavy industry over winter led to speculation the cuts won’t be as large as previously thought, contributing to steep declines in steel futures in particular.
  • They remained under pressure in overnight trade on Tuesday, weighing on bulk commodity contracts, including iron ore, during the session.

Iron ore spot markets fell modestly on Tuesday, managing to avoid what could only be described as carnage in Chinese steel futures during the session.

According to Metal Bulletin, the price for benchmark 62% fines dipped 0.2% to $67.67 a tonne, adding to the steep decline seen on Monday.

Lower and higher grades also weakened over the session.

The price of 58% fines slipped 0.5% to $38.78 while 65% fines fell by a smaller 0.4% to $96 a tonne.

While prices fell across the board, they were insignificant compared to those seen in Chinese steel futures on Tuesday.

They were massive.

Rebar futures in Shanghai slumped 4.3% from Monday’s day session close, finishing trade at 4,071 yuan. That was also well below the 4,176 yuan level it closed Monday’s night session.

Hot-rolled coil futures were hammered even more, tumbling 4.6% from Monday’s day session close to 3,969 yuan.

The losses coincided with reports that Chinese regulators will allow local officials to set output restrictions for heavy industry over winter, rather than blanket bans that had been used in the past.

“Production cuts on heavy industry will remain this winter, but detailed cutting rates will be set by local authorities based on their own situation,” an unnamed source told Reuters.

Markets had been expecting large-scale curbs to be introduced given China’s Ministry of Ecology and Environment (MEE) had proposed cutting steel production by as much as 50%, and primary aluminium as much as 30%, in some areas during winter.

The report received on Tuesday clearly created some doubt in traders minds as to whether the restrictions will be that severe, resulting in widespread losses in not only steel futures but also bulk commodity contracts traded in Dalian.

Iron ore was spared the worst of the carnage, finishing the day at 492.5 yuan, down marginally from Monday’s night session close of 494 yuan.

Coking coal futures were also resilient, ending trade at 1,287.5 yuan, only marginally below the prior close of 1,292 yuan.

“While steel prices have been a driver of iron ore markets in recent times, the spectre of better-than-expected output helped support sentiment in the raw material markets,” said analysts at ANZ Bank.

However, linked to speculation that environmental restrictions may not be as severe as previously thought, coke futures were hammered, slumping 4.9% from Monday’s day session close to finish the day at 2,275.5 yuan. It closed Monday’s night session at 2,358 yuan.

Big losses, and moves that were largely sustained in overnight trade on Tuesday.

Here’s the closing scoreboard.

SHFE Rebar ¥4,093 , -1.68%
DCE Iron Ore ¥487.50 , -1.61%
DCE Coking Coal ¥1,262.50 , -2.47%
DCE Coke ¥2,274.00 , -2.40%

While rebar futures climbed marginally, all remaining bulk commodity contracts were either unchanged or closed lower.

Given steel futures led the Tuesday selloff, the movements in those contracts could well dictate broader sentiment levels on Wednesday.

Trade in Chinese futures will resume at 11am AEST.

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