The CBA thinks it's pinpointed why iron ore slumped yesterday

Photo: Dean Mouhtaropoulos/ Getty Images.

Iron ore prices tumbled overnight, suffering it’s largest one-day percentage drop in over three months.

As a result, the benchmark price for 62% fines is now back below $90 a tonne.

However, it’s not the size of the pullback, but rather the reason for it, that is the question everyone is asking.

Metal Bulletin put it down to remarks from Zhou Xiaochuan, the governor of the People’s Bank of China, who told G20 finance ministers and central bank governors meeting in Germany over the weekend that gradual deleveraging remains one of the main themes of China’s monetary policy for this year.

That created nervousness among Chinese rebar futures traders, dragging steel and iron ore prices lower, it said.

Not exactly earth-shattering news, but stranger things have moved these markets in the past.

Others, such as Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, put the weakness down to other factors, suggesting that steel prices fell after the Chinese government reportedly announced that they want steel price increases to be linked to stronger downstream demand.

The reaction was somewhat unusual, says Dhar, especially given recent strength in Chinese industrial production and fixed asset investment, indicating that demand remains firm.

“The announcement comes despite China’s commodity intensive sectors posting impressive numbers in January and February,” says Dhar, noting that “policymakers have already signalled their intent for stable growth this year, which will likely be backstopped via infrastructure investment.”

Given heightened levels of speculation in Chinese commodity futures, it’s often hard to pinpoint what exactly is driving the increasingly wild price action which has subsequently spilled into spot and physical markets of late.

One thing’s for certain: There’ll be plenty watching the open of Chinese commodity futures at midday AEDT to see whether the slide will continue.

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