Iron Ore Bust Follows Hard on Heels of China’s Speculative Boom

Churn, Baby, Churn: China's Commodity Frenzy
  • SGX AsiaClear futures have lost more than 20% since April 21
  • Goldman among banks that predicted recent surge would falter

Don’t say there wasn’t any warning. Iron ore’s gone from boom to bust in the space of just three weeks, fulfilling predictions for a slump in prices that were jacked up to unsustainable levels by a short-lived speculative frenzy in China.

QuickTake Iron Ore Wars

In Singapore, the SGX AsiaClear contract collapsed 10 percent this week after dropping 11 percent the week before, while in China, futures in Dalian plunged on Friday to the lowest since February as steel in Shanghai capped the biggest weekly loss on record. Spot iron ore prices from Metal Bulletin Ltd. sank 6.4 percent this week to a one-month low.

Iron ore and steel are buckling again after widespread predictions the frenzy in China that propelled prices upward in April wouldn’t endure as regulators clamped down and the rallies induced higher production. Iron ore stockpiles at ports in China are near 100 million tons, while mills produced more steel than ever in March. Lower steel prices erode mills’ margins, cutting their ability to restock on iron ore, according to China Merchants Futures Co.

“Iron‎ ore prices have been on a roller-coaster ride this year,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney. “The recent pullback, partly in response to reduced speculative activity, ‎brings the iron ore price more into line with fundamentals, although we expect that further falls are still likely.”

Among those that foresaw a retracement, Goldman Sachs Group Inc. said on April 22 that iron ore’s rally was unsustainable, and a tight steel market in China was a “temporary distraction” from fundamentals. Days later, Fitch Ratings Ltd. said the surge in steel prices wouldn’t last. And at the end of last month, Brazil’s Itau Unibanco Holding SA said iron would soon drop by $10, describing the speculation as a short-term issue.

Ore with 62 percent content delivered to Qingdao fell 0.9 percent to $54.54 a dry ton on Friday, the lowest since April 8, according to Metal Bulletin. It’s sunk 23 percent since peaking at more than $70 last month. Higher raw-material costs and weaker steel prices have pushed the Bloomberg Intelligence China Steel Profitability Index to the lowest since March.

“As steel profits have dropped sharply recently, the desire to replenish iron ore stocks is not strong,” said Zhao Chaoyue, an analyst at China Merchants, said in a note on Friday. “Supplies of steel are recovering as demand weakens. Steel prices remain vulnerable.”

Global Glut

While Western Australia’s state government on Thursday raised its outlook for iron ore by 12 percent to $47.70 a ton for fiscal 2017, it also said rising output from the biggest producers will continue to pressure prices. Growth in supply will outpace growth in demand over the medium term, with the market seen in surplus until 2018-19, it said.

The slump in iron ore has hurt miners’ shares. In London, Rio Tinto Group has lost 7.7 percent this week, while BHP Billiton Ltd. slid 1.4 percent. Brazil’s Vale SA has fallen 6.4 percent this week. The trio are the world’s largest producers.

Iron ore mining executives have flagged their expectations that the recent gains in prices may not be sustained. “Iron ore bounced up to $70 a ton and I said I didn’t expect it to stay there,” Rio Tinto Group Chief Executive Officer Sam Walsh told reporters in Brisbane last week, adding that: “You have to look at the fundamentals.”

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