Iron ore drops 20% in worst week since 2008 financial crisis
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Iron ore suffered its worst weekly performance on record as Chinese steel mills ditched the commodity in response to government production restrictions and a cold real estate market.
Raw materials for steelmaking, which struck a Above $230 per ton In May, it traded at $100.80 on Friday, down 22 percent on the week, according to a price assessment by S&P Global Platts.
Analysts said the last time it experienced a sell-off of this magnitude was during the 2008 financial crisis.
Beijing wants its massive steel industry to keep production steady at just over 1 billion tons this year in a bid to slow its steel-intensive economy, which has recovered strongly since the early stages of the epidemic.
Amid simmering diplomatic tensions with Australia, the world’s largest iron ore producer, the Chinese government is taking a more active role in curbing steel production as the year approaches, according to analysts and traders.
“It’s absolutely brutal policy to be enforced,” said Tom Price, an analyst at Liberum, a London-based brokerage. “No one believed they would do it but it looks like they will.”
Although Chinese crude steel production in July and August fell 8 percent and 12 percent respectively, it is still up 5 percent in the year so far in 2020, suggesting deeper cuts are coming if Beijing is to meet its target. .
“The production cuts seem to be paying off,” said Eric Hedburg, lead iron ore analyst at CRU Consulting. “Demand for additional sizes simply no longer exists.”
Traders said the restrictions have prompted Chinese steel mills to panic about selling, aiming to reduce iron ore stocks by flooding the secondary market with contracted shipments at deep discounts.
Another factor affecting iron ore is the real estate market in China, where construction activity is expected to slow in the fourth quarter and into 2022.
Analysts say that Liquidity crunch in Evergrande, the most indebted real estate company in China, could lead to credit rationing for other developers.
“The real estate sector is a major concern,” Hedborg said. “Evergrande is something that people are watching closely in China as a leading indicator of future construction activity.”
The dramatic collapse in iron ore prices will have a major impact on major mining companies, which have been paying record dividends to shareholders on the back of booming profits from their iron ore business.
Shares in Anglo American and Rio Tinto suffered their biggest falls on London’s FTSE 100 on Friday after UBS cut its earnings forecast and advised clients to sell.
“Iron ore supplies are broadly stable in 2021, but will pick up over the next few months if Vale and Rio Tinto manage to meet their 2021 guidance,” said Miles Olsop, an analyst at UBS. “This will lead to a physical building [up] iron ore stocks in Chinese ports and a sharper decline in iron ore prices over the next six months than previously expected.”
The big drop in iron ore prices comes as the price of coke, the other ingredient needed to make steel, hits record levels in China. Because of the supply crisis.
The price of domestic coke reached $577 per ton on Friday, an increase of nearly 60 percent in the past month. Supply disruptions linked to the coronavirus have affected imports from Mongolia, while Australian coal cannot enter China due to a ban imposed by Beijing.