The iron ore price rout just went up a gear

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Iron ore spot markets continued to unravel on Tuesday, mirroring another ugly plunge in Chinese futures earlier in the session.

According to Metal Bulletin, the spot price for benchmark 62% fines fell 4.6% to $63.20 a dry tonne, extending its losses from the multi-year high of $94.86 a tonne struck on February 21 to 33.4%.

It now sits at the lowest level since October 27 last year.

The chart below puts the speed and scale of the selloff into perspective.



The rout comes just weeks from the delivery of the Australian federal budget, in which revenue projections are highly sensitive to the outlook for the iron ore price, with the commodity remaining Australia’s biggest single export.

The losses in lower grade ores were even more severe with the spot price for 58% fines tumbling 8.44% to $38.84 a tonne, leaving it at the lowest level since June last year.

“The iron ore market continued to decline today as pressure dominates across grade boundaries,” said Metal Bulletin.

The plunge in spot markets on Tuesday followed another rout in Dalian iron ore futures earlier in the session.

According to pricing from Thomson Reuters, the September 2017 contract plunged by 6.5% to 468 yuan per tonne, closing at the lowest level since late November last year.

At one point it came within a whisker of hitting limit down 8%, an outcome that would have prevented the contract falling any further during the session as per market rules.

Like the spot chart above, the hourly chart from Thomson Reuters underlines just how savage the recent selloff in futures has been.

Dalian Iron Ore September 2017 Contract. Source: Thomson Reuters.

In a note released earlier today, Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, put the slump down to a combination of increased seaborne iron ore supply, a recent spike in coking coal prices and ongoing strength in Chinese steel production despite recent price declines.

“Chinese steel output continues to lift despite falling prices, with crude steel output rising to a record-high last month,” he said. “The sharp rise in coking coal prices has also squeezed Chinese steel mill margins, further reducing the appetite of mills to purchase iron ore.”

Dhar says that steel-market related weakness will continue to push iron ore demand lower which, along with increased seaborne supply, could exacerbate price declines moving forward.

It’s a stark turnaround to the mindset seen just few months ago when surging Chinese steel production was seen as a positive for iron ore, helping to bolster confidence that Chinese steel demand was also lifting.

Prices for steel rocketed higher, as did those for the raw materials required to produce it.

However, with Chinese steel production continuing to surge even as prices slide, it’s fanning fears that too much steel is being produced at present, creating increased doubts over the outlook for iron ore demand, particularly at a time when Chinese iron ore port inventories sit near the highest levels on record.

What was once deemed to be a tailwind for iron ore prices is now being seen as a headwind, and a stiff one at that.

The weakness in iron ore coincided with another slump in Chinese steel futures earlier in the session.

The most actively traded September 2017 rebar future on the Shanghai Futures Exchange closed down 3.75% at 2,878 yuan, the lowest level since early January.

“China’s spot rebar prices continued to trend downwards on Tuesday amid slumping billet and futures markets,” said Metal Bulletin. “Sentiment remained bearish and some market participants are expecting prices to fall by at least another 200 yuan per tonne.”

Coking coal futures on the Dalian Commodities Exchange — up earlier in the day — also succumbed to the selloff across the broader steel complex, eventually closing the session down 2.88% at 1,096.5 yuan per tonne.

As seen the final scorecard from Tuesday, zinc and nickel futures also came under significant selling pressure.

SHFE Zinc ¥21,270 , -2.43%
SHFE Nickel ¥80,240 , -1.04%
SHFE Rebar ¥2,878 , -3.75%
DCE Iron Ore ¥468.00 , -6.49%
DCE Coking Coal ¥1,096.50 , -2.88%
DCE Coke ¥1,604.00 , -2.34%

It’s undeniably bearish price action, particularly following previous declines, and underlines just how pessimistic sentiment among market participants has become.

While the rout will eventually come to an end, no one appears willing to catch the falling knife just yet.