Iron Ore Crushed Again as Burgeoning Supply Helps Bears Run Riot

  • Dalian futures slump into bear market, SGX contract loses 6.6%
  • Prices tumble amid concern about rising output, Chinese demand

Iron ore’s under the cosh. The commodity was beaten down again on Thursday in what’s shaping up as a brutal month amid rising concerns that global supplies are poised to expand further while steel output cuts in China over winter will translate into lower demand.

Most-active SGX AsiaClear futures retreated as much as 6.6 percent to $62.60 a metric ton in Singapore, the lowest since July, with the contract headed for a third straight weekly loss. On China’s Dalian Commodity Exchange, prices declined into a bear market.

“Looking ahead to the potential winter environmental policy-related product cuts, SMM estimates this could reduce steel output by up to 30 million tons, and iron ore consumption by 50 million,” said Ian Roper, head of Shanghai Metals Market’s international division. “Seaborne ore supply is always seasonally stronger in the fourth quarter also, especially from Brazil and Australia, which provide the higher-grade ores the Chinese steel mills are craving.”

Iron ore’s slump this month is eroding the rally seen from June to August that was powered by buoyant demand in China as steelmakers benefited from rising product prices. Investors are now turning their attention toward prospects for increased mine supplies into 2018, as well as what will happen in China after policy makers wrap up a key political meeting in October. Adding further headwinds was a stronger dollar after the U.S. Federal Reserve signaled further interest rate rises, and a rating cut for China by S&P Global Ratings.

‘Cooling of Demand’

There’s potential for a “cooling of demand and hence prices to kick in after the 19th National Party Congress in the fourth quarter that will refocus growth away from heavy industries to services,” BMI Research said in a report. The Fitch Group unit predicts iron ore will average $50 next year from $70 in 2017.

The benchmark spot price for 62 percent ore content delivered to Qingdao sank 5.1 percent to $66.09 a dry ton on Thursday, the biggest decline since May, according to Metal Bulletin Ltd. The sell-off has seen prices weaken every week so far in September, and comes after Australia’s central bank flagged its expectation for lower prices as well as peak steel production in China.

Miners’s shares fell. Rio Tinto Group dropped as much as 2.2 percent in London, while BHP Billiton Ltd. lost 1.9 percent. Earlier in Sydney, Fortescue Metals Group Ltd., which gets all its revenue from iron ore and is seeking a replacement for its chief executive, slumped 3 percent. The trio are Australia’s biggest shippers.

In a sign of ample supplies, Sanford C. Bernstein Ltd. predicted that exports from top miners will increase 5.3 percent to 315 million tons in the third quarter on-year, according to a vessel-tracking report on Thursday. In particular, volumes from the world’s No. 1 shipper Vale SA are “much stronger” from a year ago, the analysts wrote.

Vale shares fell as much as 3.2 percent in early trading in Sao Paulo.

Iron ore may fall to $53 next year amid rising supply and concern over a China slowdown, Citigroup Inc. said in a report on Wednesday. Australian exports are expected to expand to 880 million tons next year from 841 million in 2017, while Brazil’s rise to 407 million from 385 million, it said.

Among new supplies coming to the seaborne market are shipments from Vale’s giant new mine in Brazil, S11D. The project is expected to supply 21 million to 23 million tons by the year-end, when it’ll hit 25 percent of capacity, the company said in a presentation published on its website.

Amid the sell-off, there were voices of optimism. Iron ore’s prospects are “stable for the foreseeable future, five years out,” Fortescue Chairman Andrew Forrest told Bloomberg in an interview in New York, citing the outlook for increased demand across Asia. “I don’t think it’s going to be a really colorful commodity: it’s only colorful because of huge swings and roundabouts on the Chinese futures market. But demand is steady and supply is steady.”

— With assistance by Martin Ritchie, R.T. Watson, David Stringer, Joe Deaux, and Susanne Barton

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