Iron Ore Sags Again as Forced-Sale Speculation Gathers Momentum

  • Asian futures’ slide may signal slump into $50s for spot price
  • ‘Supply-side pressure is huge as ever,’ says Maike’s Dang

China's Iron Ore Demand Has Been Slowing

Iron ore futures are under pressure again in Asia -- signaling a possible return to the $50s for the benchmark spot price -- as concern builds about the outlook for rising supply and China’s clampdown on leverage ripples through markets, possibly triggering forced sales.

The most-active contract in Dalian lost as much as 1.8 percent, while the SGX AsiaClear futures in Singapore fell 0.9 percent to $59.30 a metric ton. After a five-day losing run, the spot price for 62 percent content is at $60.15 a dry ton, the lowest since October, according to Metal Bulletin Ltd.

The commodity has sunk on concern mine supplies will go on rising just as China’s mills enter a weaker period for demand and policy makers in Asia’s top economy rein in leverage. Stockpiles at mainland ports are near a record after robust shipments from Australia and Brazil, with miner BHP Billiton Ltd. citing the inventories as among risk factors that may tug prices lower. Citigroup Inc. has said there may have been forced sales by some traders in China.

“Iron ore doesn’t have good fundamentals,” said Dang Man, an analyst at Maike Futures Co., citing factors including the crackdown on leverage, which has tightened liquidity and hit commodity markets. “Supply-side pressure is huge as ever, and mills are still seeking to draw down inventories.”

‘Forced to Destock’

Citigroup offered a mixed picture on iron ore in a note on metals on May 7. “We suspect that a good number of physical traders that are financially leveraged up to five times have been forced to destock due to rising short-term borrowing costs and the recent sharp price corrections,” the bank said. Still, there could be some upside to iron ore in the second half if steel capacity cuts accelerate and steel prices climb on higher demand, it added.

Citigroup isn’t alone in saying that some traders may be compelled to sell holdings into a falling market as China tightens. Shanghai Cifco Futures Co. said this week signs are emerging that traders are dumping their holdings.

Iron ore’s decline has hurt miners’ shares. In Sydney, Fortescue Metals Group Ltd., the country’s no. 3 shipper, has lost 17 percent this year. Rio Tinto Group is 1.9 percent lower in 2017, while BHP stock is 7.6 percent weaker.

The slump in prices was flagged well in advance by analysts including Barclays Plc and Capital Economics Ltd., as well as Australia’s government, which warned last month rising supply may drive prices back into the $50s. Westpac Banking Corp., which placed first in predicting prices in the first quarter according to data compiled by Bloomberg, is also bearish.

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