- Mid and higher iron ore grades were slammed on Friday, adding to substantial losses seen earlier in the week.
- A sharp decline in profitability has seen Chinese steel mills favour cheaper, less-efficient ore in recent weeks.
- Chinese bulk commodity futures were hammered in overnight trade on Friday, pointing to the potential for further declines in spot markets on Monday.
Iron ore spot markets were hammered again on Friday, adding to substantial declines seen earlier in the week.
According to Metal Bulletin, the price for benchmark 62% fines slumped 2.8% to $70.13 a tonne, leaving it at the lowest level since October 8.
It’s now lost 9.2% since November 9, including 6.1% in the past three sessions alone.
Higher grade ore was also under pressure with the price for 65% Brazilian fines slipping 2% to $88.90 a tonne, a level not seen since late June this year.
In contrast, the price of 58% fines bounced after several days of heavy losses, lifting 0.5% to $43.70 a tonne.
“Chinese steel mill margins have dropped sharply in recent weeks, primarily driven by lower steel prices,” says Vivek Dhar, Mining and Energy Commodities Strategist at the Commonwealth Bank.
Low margins will see steel mills prioritise affordability over productivity and emission reduction. That will see mills move to low grade ore, a trend that has already resulted in mid-grade and high-grade iron ore premiums falling.”
As seen in the chart below, the price discount for 58% fines compared to the benchmark fell to 37.2% on Friday, the narrowest it’s been since October 2017.
Mirroring the decline in spot markets, Chinese steel futures continued to slide on Friday, adding to pessimism among investors.
The January 2019 rebar contract in Shanghai finished trade at 3,623 yuan, down from 3,730 yuan on Thursday evening. The decline came despite data showing Chinese rebar inventories held by traders slipped by 3.3% to 3.07 million tonnes last week, according to Mysteel Consultancy.
The weakness in steel futures flowed through to bulk commodity contracts traded separately in Dalian.
Having closed at 510.5 yuan on Thursday evening, iron ore futures slumped, finishing the day session at 497 yuan, the lowest level since early October.
Coking coal and coke contracts also fell, ending trade at 1,340.5 and 2,188 yuan, down from 1,351.5 and 2,237 yuan on Thursday night.
As seen in the scoreboard below, bulk commodity futures remained under pressure on Friday evening, adding to the losses seen earlier in the day.
SHFE Hot Rolled Coil ¥3,465 , -2.04%
SHFE Rebar ¥3,627 , -1.79%
DCE Iron Ore ¥487.00 , -4.04%
DCE Coking Coal ¥1,321.50 , -2.22%
DCE Coke ¥2,170.00 , -2.76%
The weakness points to the potential for further weakness in spot and physical markets on Monday.
Trade in Chinese futures will resume at midday AEDT.
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