Chinese iron ore futures are getting smoked

DANIEL MIHAILESCU / AFP / Getty Images

Chinese iron ore futures were slammed on Monday, doubling the losses seen overnight on Friday.

The most actively traded September 2017 contract on the Dalian Commodities Exchange slumped 5.26% to 549.5 yuan a tonne, having hit a low of 541 yuan earlier in the session.

Here’s the final scoreboard, revealing that it was not just iron ore that was the wars on Monday.

It was a big, ugly move no matter how you put it, particularly for coking coal which was sitting higher before the start of trade.

SHFE Nickel ¥81,890 , -2.94%
SHFE Rebar ¥3,108 , -3.06%
DCE Iron Ore ¥549.50 , -5.26%
DCE Coking Coal ¥1,136.50 , -5.29%
DCE Coke ¥1,602.50 , -3.90%

As a result of today’s decline, the September 2017 iron ore contracts now sits at the lowest level since early February, suggesting that further downside pressure in spot markets may also follow suit when Metal Bulletin releases its daily Iron Ore Index later in the session.

On Friday, the spot price for benchmark 62% fines slid by 1.5% to $85.06 a tonne, according to Metal Bulletin, leaving its loss for the week at 7.9%.

Helping to explain the weakness in iron ore contracts on Monday, rebar futures traded separately on the Shanghai Futures Exchange also tumbled, finishing down 3.06% at 3,108 yuan. At one point it fell to as low as 3,055 yuan.

While some put the decline in iron ore prices down to mounting inventory at Chinese ports, currently sitting at the highest levels since 2004 according to data form SteelHome, others believe that the outlook for steel prices is now playing an even greater role in determining iron ore prices.

“With iron ore prices so leveraged to steel prices at the moment, market conditions in China’s steel sector are increasingly becoming more important,” Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, wrote last week.

“With steel stockpiles now at levels seen in early 2015 on a days of supply basis, we may finally be at the end of China’s restock cycle, curbing a key upside driver for steel prices.

“Iron ore prices should eventually face fewer upside risks as a result,” he said.

In note released late last week, Yang Luo, an analyst at UBS, said that a turning point may have been reached for China’s steel sector.

“From our recent on-the-ground checks, demand is satisfactory, driven mainly by accelerating infrastructure investment and mixed property investment. However, as steel production has also been rising in reaction to the current high profitability, we think the price is still subject to downside pressure due to worsening supply/demand dynamics.”

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