Iron Ore Succumbs to Bear Market and May Extend Slump Into $50s

Updated on
  • Benchmark spot price tumbled 12% last week as steel sells off
  • Capital Economics flags prospect of mills’ cutbacks in China

Iron ore has slumped back into a bear market after posting the biggest weekly loss in 16 months amid concern that record demand in China may ease off as mills enact winter output cuts just as data from the top user signals that the economy may be cooling.

Losses have probably been driven by “the realization that if, as planned, large amounts of steel capacity are taken offline during the winter months, this will mean lower demand for iron ore,” Caroline Bain, chief commodities economist at Capital Economics Ltd., said by email. “August activity and spending data suggested that the Chinese economy is starting to slow.”

Spot ore with 62 percent content in Qingdao slipped 0.8 percent to $63.06 a dry metric ton on Monday, after retreating 12 percent last week, according to Metal Bulletin Ltd. Prices have lost more than 20 percent since peaking near $80 in August, meeting the common definition of a bear market. Lower-grade 58 percent ore, which trades at a discount, has sunk into the $30s.

Iron ore is in retreat after a tumultuous year that’s seen the commodity surge in February and again in June-to-August only for gains to be rolled back. While Chinese steel output has been running at a record pace, aiding iron ore, policy makers plan to order production cuts over winter to curb pollution. Last week, Australia’s central bank predicted weaker iron prices, flagging risks including rising supplies as well as concern that China may be nearing peak steel.

“We expect the price of iron ore to fall further and to average just $55 a ton in the fourth quarter,” Bain said. Capital Economics placed first in a Bloomberg ranking of iron ore forecasters in the second quarter. “Much will depend on whether the capacity closures take place on the scale that is planned.”

Tangshan Curbs

There are signs of cutbacks before winter starts. The steel-making hub of Tangshan city plans to halve output of pellet and sintering plants -- both used to make steel -- from Monday as part of an “emergency measure” to reduce pollution, the environmental bureau said. The duration of the cuts will be notified by the municipal government at a later date.

The planned winter cuts could reduce steel output by up to 30 million tons and iron consumption by 50 million, according to Ian Roper, head of Shanghai Metals Market’s international division. It makes for a “risky picture” for prices given ore supply is always seasonally stronger in the fourth quarter, he said.

Steel prices in China, which accounts for half of worldwide production, are losing ground after hitting multiyear highs, paring mills’ profitability and undercutting iron ore demand. In Shanghai, futures for reinforcement bar fell 6.6 percent last week, while the contract for hot-rolled coil dropped 7.4 percent, the biggest loss since May.

More iron ore supply is on the way. Shipments from the top producers are estimated at 314.9 million tons this quarter, up 5.3 percent on-year, according to Sanford C. Bernstein & Co., citing vessel-tracking data. Last week, Vale SA said its giant S11D mine will hit 25 percent of capacity by year-end.

Shares of Vale, the world’s largest iron-ore miner, fell 2.3 percent at 12:53 p.m. in Sao Paulo.

Iron ore futures in Asia fluctuated on Monday. In Singapore, the SGX AsiaClear contract initially fell as much 2 percent to $61.75 a ton, then rebounded to trade 1 percent higher. In China, the most-active price on the Dalian Commodity Exchange also swung from a loss to a gain.

— With assistance by R.T. Watson

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