Iron ore price tumbles to a near six-month low

April 18, 2017

by: Neil Hume, Commodities and Mining Editor

The price of iron ore, a key ingredient in steelmaking, dropped almost 5 per cent to a near six-month low on Tuesday, hit hard by a decline in Chinese steel prices and concern about a supply glut.

The steelmaking ingredient is a key source of profits for Anglo American, BHP Billiton, Rio Tinto, which were among the worst performing stocks in Europe on Tuesday.

Benchmark Australian ore for immediate delivery into China was down $3.10 to $61.50 a tonne, according to an assessment from The Steel Index, a price reporting agency.

Iron ore has slumped by a third since hitting $94.5 a tonne two months ago, as steel production in China has continued to rise, fuelling concerns about excessive supply.

China’s steel output rose 1.8 per cent in March to a record 72m tonnes, figures released on Monday showed, as mills ramped up production in anticipation of a seasonal pick-up in demand.

“The weeks following Chinese new year saw clear overheating, particularly in steel rebar and billet markets,” said Seth Rosenfeld, an analyst at Jefferies.

The weeks following Chinese new year saw clear overheating, particularly in steel rebar and billet markets

That in turn has started to weigh on prices. Shanghai rebar — a steel product widely used in construction — dropped to a 10-week low overnight, unsettled by Chinese house price data that showed a fourth straight month of slowing growth in March.

Iron ore’s sell-off has already hurt the share prices of major mining companies.

Every $1 per tonne move in the price can affect hundreds of millions of dollars to the earnings of these companies. Since iron ore hit almost $95 a tonne in February, shares in Anglo have fallen 17 per cent, while BHP and Rio are both down by 13 per cent.

“We maintain a bearish view on iron ore,” said analysts at Citigroup, who expect prices to remain weak as an additional 70-75m tonnes of supply from Australia, Brazil and India hits the market and demand growth in China slows. They also reckon Chinese production will increase this year, adding a further 20m-30m tonnes of supply.

A build-up of inventories at China’s ports is also weighing on iron ore, according to traders. Stockpiles of the raw material have climbed to 134m tonnes this year, up more than a third from the first half of 2016. China imports about two-thirds of the world’s seaborne ore.

“We believe a sustained draw on the massive inventory of port material is the largest risk to iron ore prices, having accounted for 6.5 per cent of apparent demand this year,” said Richard Knights, analyst at Liberum. “A reversal could see a 13 per cent demand swing just as seasonal and structural iron ore supply ramps up.”