The Canary in the Coal Mine, Iron Ore Prices continue to Drop

The Canary in the Coal Mine, Iron Ore Prices continue to Drop

Iron Ore is a leading indicator of the health of the overall steel market.  When Iron Ore prices are rising, so are steel prices and typically the global steel market.  If the current downtrend in Iron Ore is not a blip, then we could have already seen the top of the current steel market pricing for 2017.  The article below paints a bearish picture.

“The spot price of iron ore dropped, extending last week’s selloff, paced by a plunge in Chinese iron and steel futures.

Ore with 62 per cent content shed 2.5 per cent to $US57.02 a tonne on Wednesday, extending its recent slide, as trading resumed in China after a four-day break, according to Metal Bulletin.

The losses came amid continuing concerns about the outlook for growth in China. While China released positive official manufacturing data for May, in line with April and slightly ahead of consensus, efforts to check financial risks are expected to damp the economy as the year progresses.

“We suspect that the current stability of growth will prove temporary,” said Julian Evans-Pritchard, China economist at Capital Economics.”With the regulatory crackdown on financial risks still weighing on credit growth, it will be difficult to avoid a further slowdown in the coming months.”

The price decline is leading to a rethink on profit forecasts for the major producers. In a May 29 note, UBS said with the spot price of iron ore “9 per cent below our CY 17 forecast, and combined with FX and freight implies a 14 per cent downgrade to FMG’s FY 17E earnings”.

In London trading overnight, shares of both BHP Billiton and Rio Tinto were each 2.5 per cent lower.

As for those Chinese futures, it was a rough start to a shortened week.

The most-traded iron ore contract on the Dalian Commodity Exchange fell as low as 423.50 yuan ($US62) a tonne, its lowest since November 2016. It closed down 6 per cent at 424.50 yuan.

The contract lost 16.7 per cent in May, its biggest monthly decline since May 2016.

In the medium to longer term, iron ore should move towards $US50 per tonne, said Julius Baer analyst Carsten Menke.

“This is based on the assumption that Chinese steel production has moved beyond its structural peak and would decline steadily over the coming years,” Menke said.

“At the same time, we see iron ore supplies from Australia and Brazil expanding and displacing higher-cost Chinese volumes.”

Last week, iron ore stocks at China’s ports reached 136.6 million tonnes , the highest since consultants SteelHome began tracking the data in 2004. That is enough to build the Eiffel Tower in Paris more than 13,000 times over.

The most-active rebar on the Shanghai Futures Exchange closed down 3.6 per cent at 3095 yuan a tonne. That was its biggest single-day drop in almost a month.

Steelmaking coal also slumped. Coking coal traded on the Dalian exchange fell by the exchange-set limit of 9 percent to end at 949 yuan per tonne and coke dropped 7.6 per cent to 1426.50 yuan.”

Australian Financial review

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