Iron ore is imploding -- now down 27% in just weeks

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The iron ore price is imploding.

Following the ugly lead provided by Chinese futures on Monday, the spot iron ore price followed suit, suffering one of the largest declines seen in years.

According to Metal Bulletin, the spot price for benchmark 62% fines fell by 6.69%, or $3.67, to $51.22 a tonne, leaving it down 27.3% from the multi-year peak of $70.46 a tonne struck on April 21.

The decline was the third-largest in percentage terms in the past two years, and left the price at the lowest level seen since March 3 this year.

The losses in physical and futures markets followed news that Chinese iron ore port inventories swelled to over 100 million tonnes last week, leaving them at the highest level seen since March last year.

That followed the revelation that Chinese crude steel output contracted in April after hitting a record high in March, declining marginally according to figures released by the China Iron and Steel Association (CISA).

Given the increasing correlated relationship between the two, it’s also clear that an unwind of speculative positioning in Chinese iron ore futures is also impacting prices in the physical iron ore market.

After watching prices in many bulk commodity futures rally more than 50% in less than two months, regulators at both the Dalian Commodities Exchange and Shanghai Futures Exchange introduced measures in recent weeks to discourage excessive levels of speculation in these markets.

At face value, it appears this has been a success.

Suggesting that the unwind in the spot iron ore price may continue on Tuesday, Chinese iron ore futures were hammered again in overnight trade, closing the session at 349 yuan, representing a decline of 2.79%.

Should the relationship between futures and physical markets hold true, it indicates that the spot price could give the $50 a tonne level a test if the losses in futures markets are maintained or built upon on Tuesday.

Trade in Chinese commodity futures will resume at 11am AEST.

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