Photographer: Brendon Thorne/Bloomberg

Iron's Rally Gives Way to Rout as China Futures Post Record Loss

  • Banchero sees correction after prices have gained ‘too much’
  • Singapore’s SGX AsiaClear contract declines for a sixth day

Iron ore is getting beaten down after a flurry of warnings that gains may be vulnerable. Futures in China have posted an unprecedented weekly loss; the most-active contract in Singapore is lower for a sixth day; and spot prices had the biggest slump since November.

“It’s an overdue correction in prices, which have risen too much,” Ralph Leszczynski, head of research at shipbroker Banchero Costa & Co., said in an email on Friday, while cautioning that the drop has come despite a positive underlying picture. “Fundamentals for iron ore remain very strong at present.”

Iron ore rallied last year on stronger-than-expected demand and extended gains into 2017, benefiting miners from Brazil’s Vale SA to BHP Billiton Ltd. and Rio Tinto Group, as China bought record volumes. This year’s advance has unfolded against a backdrop of warnings that gains may prove fleeting, with mines continuing to expand and concerns that China’s steel demand may falter. Still, imports by the top buyer are expected to be at an all-time high this month, close to 100 million tons, and remain strong in April, said Leszczynski.

“I don’t think this is the big sell-off yet,” Tomas Gutierrez, an analyst at Kallanish Commodities, said by phone from Shanghai. This week’s poor performance is attributable to concerns over fresh property curbs in China, as well as uncertainty about the policy outlook from Donald Trump’s administration and higher U.S. interest rates, according to Gutierrez.

In Dalian, most-active futures collapsed 19 percent this week -- the most on record -- as steel prices backtracked, with reinforcement bar in Shanghai tumbling 12 percent. On Friday, the iron ore contract for September lost as much as 2.2 percent to 567.5 yuan a metric ton, the lowest since Jan. 10, before ending level at 580.5 yuan.

Benchmark spot ore with 62 percent content in Qingdao fell 1.5 percent to $85.06 a dry ton on Friday, taking this week’s retreat to 7.9 percent, according to Metal Bulletin Ltd. In Singapore, SGX AsiaClear futures had the fourth weekly loss in five, about 9 percent lower.

Plenty of banks and even some producers have flagged risks. Barclays Plc said this week prices will slump into the $50s in the second half as mills’ profitability is set to drop, encouraging producers to shift consumption toward abundant lower-grade ores. The bank was restating a bearish position.

The drop has hurt mining shares. Rio declined 4.5 percent in Sydney trading this week, wiping out most of this year’s gain. In Brazil on Thursday, Vale retreated 1 percent and is on course for a month decline.

Other investors are banking on continued demand. On Friday in Australia, China State Construction Engineering Corp., the nation’s biggest builder, signed an agreement with BBI Group Pty, owned jointly by New Zealand’s Todd Corp. and Nyco Pty, to develop a $4.6 billion mine and infrastructure project.

China is the world’s largest steel maker, accounting for about half of global supply, and the country is also the leading buyer of seaborne ore. Holdings at ports have expanded to an unprecedented 132.5 million tons, according to weekly figures from Shanghai Steelhome E-Commerce Co.

— With assistance by Ranjeetha Pakiam, and Martin Ritchie

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