Iron ore suffered one of the steepest weekly declines in history as steel mills in China dumped the commodity amid moves to curb steel production and a cooling property market. in China.
Once traded above 230 USD/ton in May, now iron ore price has plummeted to 100.8 USD/ton at the end of session 17/09. In the last week, prices have fallen 22%, according to S&P Global Platts.
The last time iron ore sold off like this was during the 2008 financial crisis, analysts said.
Beijing wants the steel industry to maintain output at more than 1 billion tons this year in an effort to reduce environmental pollution.
In the context of tense diplomatic relations between China and Australia – the world’s largest iron ore producer, Beijing actively restricts steel output as the year gets closer to the end of the year, according to analysts.
“It’s a pretty brutal policy. No one believes they will, but it looks like they will,” said Tom Price, an analyst at brokerage Liberum.
Although China’s crude steel output decreased by 8% and 12% in July and August respectively, in the first 8 months of the year, output still increased by 5% compared to the same period last year. This suggests more drastic output cuts if Beijing is to hit its target.
“The production cuts really seem to be working,” said Erik Hedborg, Iron Ore Analyst at consulting firm CRU. The need to buy more iron ore is gone.”
Production cuts from China caused steel mills to panic sell to reduce iron ore inventories. They sell iron ore contracts to the secondary market at a large discount.
Another factor affecting iron ore prices is the cooling of the property market in China. Construction activity in the world’s second-largest economy is expected to slow in the fourth quarter of 2021 and into 2022.
Analysts say the liquidity crisis at Evergrande – China’s most indebted real estate group – could lead to a credit squeeze for other companies in the industry.
Hedborg said: “The real estate sector is a big concern. The Evergrande incident is being closely watched in China as a leading indicator of future construction activity.”
The sharp drop in iron ore prices will also have a big impact on the mining giants. These companies have paid record dividends to shareholders thanks to the explosive profits from the iron ore business.
Shares in Anglo American and Rio Tinto fell the most in London’s FTSE 100 index on September 17 after UBS cut their earnings forecasts and advised clients to sell shares.
“Iron ore supply has been stable since early 2021 but will increase over the next few months if Vale and Rio Tinto are determined to meet their production targets. This will lead to an increase in iron ore inventories at Chinese ports and a sharper decline in iron ore prices over the next six months than previously forecast,” said UBS analyst Myles Allsop.
The drop in iron ore prices comes just as the price of another steel-making staple, coking coal, surged to a record in China due to tight supplies.
Coking coal prices traded at $577/ton on September 17, up nearly 60% over the past month. Supply disruptions related to the Covid-19 pandemic have affected coal imports from Mongolia, while Australian coal cannot enter China due to Beijing’s ban.