- Chinese iron ore and rebar contracts slumped overnight, losing as much as 4%.
- Iron ore futures have entered a technical bear market.
- The latest market rout follows news that the United States will apply tariffs on high-end Chinese manufactured goods entering the country.
Iron ore spot markets stabilised on Thursday after suffering heavy falls earlier in the week.
However, with Chinese futures tumbling in overnight trade, the early signs suggest the selloff may resume with gusto on Friday.
According to Metal Bulletin, the spot price for benchmark 62% fines slipped 0.1% to $67.18 a tonne, pulling back slightly after rising 0.5% on Wednesday.
Small declines were also seen across the grades.
Ore with 65% Fe content and 58% fines both fell 0.2% to settle at $83.50 and $38.98 a tonne.
The modest declines followed weakness in Chinese rebar futures in Shanghai with the most actively traded May 2018 contract sliding 0.7% to 3,619 yuan a tonne.
Analysts put the drop down to persistent concerns about the outlook for demand.
“If demand doesn’t pick up over the next two weeks, steel traders may give up resistance and sell off,” Zhao Chaoyue, an analyst with Merchant Futures in Shenzhen, told Reuters.
According to data from Steelhome Consultancy, rebar inventories held by traders rose to 9.79 million tonnes as at March 16, the highest since April 2013.
“The rapid rise in steel stockpiles has markets worried,” said Viveh Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank.
The rise in stockpiles reflect stronger steel production and subdued demand. China’s crude steel output rose by 5.9% year-on-year in January and February despite the restrictions in place on industrial output during the heating season.
“The increase in production reflects just how strong the incentive was for steel mills to boost production given steel mill margins.”
This chart from Dhar shows the sharp and sudden lift in rebar inventories by day supply in recent weeks.
“Concerns that China’s construction sector could slow have further weighed on steel and iron ore markets,” Dhar says, adding that the recent weakness was sparked by new home prices rising in fewer Chinese cities in February, sparking concern about the outlook for residential construction.
“If steel demand doesn’t pick up in coming weeks, we could see iron ore prices fall further.”
Despite the slide in rebar futures during Thursday’s day session, iron ore contracts managed to buck the trend with the May 2018 contract closing the session at 466.5 yuan a tonne.
Coke and coking coal futures finished mixed, last trading at 1,964.5 yuan and 1,275.5 yuan a tonne respectively.
However, as seen in the scoreboard below, all contracts suffered significant declines in overnight trade on Thursday, led by iron ore.
SHFE Rebar ¥3,535 , -2.43%
DCE Iron Ore ¥449.00 , -3.96%
DCE Coking Coal ¥1,249.00 , -2.95%
DCE Coke ¥1,928.00 , -1.93%
At 449 yuan a tonne, the May 2018 iron ore contracts sits at the lowest level since November 2, shedding 20.5% since January 10.
It’s now in a technical bear market.
Rebar, coke and coking coal contracts were also hammered during the session, coinciding with the announcement that the United States will apply tariffs of up to 25% on imports of predominantly high-end Chinese manufactured goods.
The tariffs are expected to affect $50 billion worth of goods imported from China. Certain Chinese investments into the US will also be limited.
On top of already skittish sentiment towards the outlook for Chinese steel demand, this may explain the scale of the slide seen in futures overnight.
Trade will resume at midday AEDT in all Chinese commodity futures contracts. There’s likely to be more than a few eyes watching their performance today.