Commodities Corner: Iron Ore in Freefall

By Glenn Dyer | More Articles by Glenn Dyer

Any doubts that the boom in iron ore prices was over were buried on Friday when prices slumped to multi-month lows, triggering losses up to 25% since the all-time highs of mid-May

The metal Bulletin’s Fastmarkets index price at Friday’s close was $US181.57 a tonne for 62% Fe fines delivered to northern China, down 7.6% from Thursday’s closing, the lowest since April.

It was also down 9.8% for the week and 15% for the month.

Iron ore prices fell under $US200 a tonne for the first time since late May on Thursday and then plunged on Friday.

It was a similar story for the 58% Fe fines 9the type Fortescue Metals still depends on) which dropped to $US146.61 a tonne for a weekly loss of more than 11%, nearly 19% for the month.

And the 65% fe fines product from Brazil was also hammered, closing at $US214.40 a tonne down 6% for the day (it is still in demand for its higher iron content) and nearly 9% for the week. For July the price lost$US347.50 a tonne or 15%.

Traders said prices, which have been edging lower for much of the past fortnight or so, finally broke on Friday and fell steeply under the weight of China’s continuing moves to reduce steel output in line with its decarbonization drive, and slowing domestic demand and weakening prices.

Singapore futures plunged 4.5% to $US182.10 a tonne (for 62% Fe ore) and lost around 8% for the week. Prices in Dalian in China fell more than 8% for the day and the month for its biggest monthly fall in 18 months.

China has asked mills to limit this year’s crude steel output to no more than the 2020 volume (1.065 billion tonnes) after the first-half production grew nearly 12% compared with a year earlier.

Shagang Group, the world’s fourth-largest steel mill, said this week that it’s curtailing production and overseas sales to comply with government efforts to cut emissions. It won’t be the last with other companies rumoured to have already throttled back on output.

However traders say that there will be a surge in steel prices in the next month or so as construction companies find supplies are short – especially for rebar (used in construction as reinforcing), long products and hot rolled coil.

The government, through its drive to cut pollution and carbon emissions, could very find itself trying to control a surge in steel prices at the wrong time as the pace of growth in the economy continues to languish compared to the final months of 2020 and early this year.

The government’s attempts to limit production started in March and failed to have any impact, given crude steel output rose 12% on the depressed levels of the Covid-hit first half of 2020.

For the limit of no more than 2020’s record 1.065 billion tonnes to be met, output will have to be cut by 12% in the six months to December (This has already been explained to ShareCafe readers in mid-July) after the six month production data was released.

That is raising expectations that activity will need to be restricted significantly through the end of the year. This explains China’s moves to curb steel exports, with the aim of  to offset supply shortfalls. At the same time it said it will allow steel companies to import tariff-free a range of finished and semi finished products – even pig iron and crude steel (ie exporting the carbon emissions problems elsewhere).

Some steel producers in Asia (such as BlueScope in Australia) are already exporting surplus coke into China and other markets.

China’s property sector is also wobbling – the country’s central bank ordered lenders in Shanghai to lift interest rates last month to first home buyers and has also told five cities to stabilise overheating housing markets.

The slump in prices will change the bullishness in stockmarkets abut the big global miners – BHP, Rio Tinto, Anglo American and Vale, the Brazilian giant.

Investors, though, have been more circumspect in their enthusiasm for Fortescue which has underperformed the ASX this year and in July, and against its peers.

The slump in iron ore prices on Friday will bring Australian investors up short because they have been ignoring the slide as they drool about the massive returns from Rio and to come from BHP and Fortescue.

And the two will join Rio with record dividends, but from they will be the peak – from now on the outlook for iron ore – the major profit driver – is going to be weak – falling demand, falling prices and the same again.

Investor enthusiasm rose after the After last week’s interim results from Rio Tinto and Vale for the six months to June (and the 4th quarter for Vale) and Fortescue’s record June quarter and 2020-21 production and sales reports.

While the likes of BHP, Rio and Vale have copper and nickel – the new ‘hot’ renewable metals (old, but made new again) – mines and sales – BHP has the world’s biggest mine in Chile, Fortescue only has iron ore and last week’s fall has exposed that in a rather cruel fashion.

Fortescue said its 4th quarter average price was $US168 a tonne because of the record highs in the three months. Friday’s close for 58% few fines – Fortescue’s main product – slumped to well under that level at $US146.61 a tonne, which was only $US9 a tonne above the company’s full year average price of$US135 a tonne.

Investors seem to have a good understanding of Fortescue’s exposure – the shares fell 5.4% on Friday as investors saw the sell off in Chinese and Singapore futures markets. That left them down 1.3% last week and cut July’s gain to 5.6% and the year to date rise to 6.3%.

Compare to the way BHP shares have performed – a record price on Friday of $54.55 and a record close of $53.49. That left a gain for the week of 4.3%, 10% for July and 26% year to date.

Rio shares fell 0.5% on Friday but still rose 5% for the week, 6% for July and 17.2% year to date.

The copper holdings of bHP and Rio have helped them resist the slide in iron ore prices, with BHP having a growing nickel business and an interesting takeover in base metals in Canada underway, plus a surge in oil earnings and cash flows to help make up for any pressures from the iron ore price slide.

The ASX 200 fell 0.02% for the week, was up 1.1% for July and is up 12.2% year to date, meaning BHP and Rio shares have outperformed, but for how long after the iron ore sell-off?


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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