Iron Ore Takes One-Two Punch as Frenzy Cools, Stockpiles Expand

Rio Tinto Reaffirms Goal for Iron Ore Output
  • Recent gain `has little grounding in fundamentals,' Dang says
  • Futures retreat in Dalian as rebar and coking coal decline

Iron ore has taken a one-two punch as China’s moves to cool frenzied speculation in raw material futures hurt prices in the top user, while rising port stockpiles signal ample supply for steelmakers.

Benchmark prices for cargoes delivered to Qingdao have lost more than 9 percent in the past two sessions, while futures in Dalian fell for a third day on Thursday, declining as much as 4.8 percent. Prices rose slightly on Thursday.

Iron ore is retreating from a 15-month high in April as the authorities in China quell the spike in speculation in commodities contracts, including iron ore, steel and coking coal. Fortescue Chief Executive Officer Nev Power this week praised China’s moves, describing the level of speculative trading as unhealthy, while investor Jim Rogers said the authorities’ actions were terrific. Holdings at China’s ports have expanded to the highest since March 2015.

‘Huge Quantities’

“The wildcard in relation to iron ore at the moment is the Dalian metal futures exchange, where there are huge quantities of iron ore being traded,” Rio Chief Executive Officer Sam Walsh said at the company’s annual meeting in Brisbane on Thursday. “I know the Chinese government is working to put greater controls on that exchange, because the volumes at the moment are excessive.”

Sam Walsh.
Sam Walsh.
Photographer: Simon Dawson/Bloomberg

Ore with 62 percent content delivered to Qingdao added 0.3 percent to $60.25 a dry ton on Thursday, according to Metal Bulletin Ltd. Futures on the Dalian Commodity Exchange plunged 5.2 percent to close at 412.5 yuan a ton, while contracts for steel reinforcement bar and coking coal also fell.

“Inventories have been accumulating, while speculative interest is also starting to wane; more losses could be on the cards,” Dang Man, an analyst at Maike Futures Co., said by phone. “The rally we’ve seen has little grounding in fundamentals as supply-side pressure remains.”

Investors’ appetite for futures has waned after the exchanges raised fees and margins amid orders from regulators to limit speculation. Fortescue’s Power said the Chinese government is playing “a really good role” of encouraging market forces while at the same time not letting markets get out of control.

Supply Outlook

Steel mills in China, which account for half of global supply, have been ramping up output as product prices recovered, resuscitating profit margins. Production in March was a record, and Fitch Ratings Ltd. has forecast a further increase in April, while warning that the rising supply may hurt prices.

Australia’s Port Hedland, which ships cargoes for BHP as well as the Roy Hill project in the Pilbara backed by billionaire Gina Rinehart, reported on Thursday that cargoes totaled 37.7 million tons last month. While that’s lower than March’s 39.5 million tons, it’s still up from 35.4 million tons a year earlier.

“There is additional supply coming on, Vale are bringing on more supply, Roy Hill is bringing on more supply, FMG seems to be increasing their volumes,” Rio’s Walsh said, referring to the Brazilian producer Vale SA. “Those will have an impact on supply and demand.”

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