Iron ore prices tumbled more than 6 per cent to their lowest level since November, as a glut of supply in China of the key ingredient in steel weighs on the price.
The sharp drop on Wednesday is the latest swing for a commodity that raced higher over the second half of last year to more than $90 a tonne. The benchmark 62 per cent ore for immediate delivery into China was trading at $67.9 a tonne, according to the Steel Index, a price reporting agency.
Signs of faster economic growth in China helped the rally in the second half of last year, leading to a build-up of iron ore inventories at the country’s ports. With China beginning to tighten credit conditions this year, the market now faces the risk of weakening demand and the inventory overhang.
Inventories of iron ore at Chinese ports have climbed to 134m tonnes this year, up more than a third from the first half of 2016, according to analysts at J Capital. Analysts at Goldman Sachs expects iron ore prices of $60 in the second half.
Central to the profitability of miners and steelmakers, iron ore is seen as a proxy for the pace of industrial activity and construction in China. The Asian economy imports about two-thirds of the world’s seaborne ore.
Given nervousness around the outlook for the price, about 60 per cent of iron ore traders in China plan to cut their inventories this quarter, according to a survey by J Capital. As a result the price of iron ore is likely to fall a further 10 to 15 per cent this month, they forecast.
Chinese steel prices may have peaked this year with those for hot-rolled coil, a common form in which the metal is sold, having fallen about 12 per cent over the last three weeks, according to analysts at Macquarie.
“Chinese export volumes may be on the rise once more, and the natural chain of events is that EU and US prices will follow with a lag,” they noted.
That, in turn, could hurt global steel prices, reducing margins for producers.
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