Iron ore suffered another day of losses with the steelmaking commodity sinking below $60 a tonne as a speculative frenzy in China cooled following pressure from local exchanges and regulators.
Chinese iron ore futures experienced a surge in trading volumes last month as speculators piled into the market, looking for quick and easy ways to bet on a pick-up in construction activity and rising steel production.
The frenzied trading on domestic Chinese exchanges pushed prices higher and fed through into the physical market where iron ore was trading at almost $70 a tonne late last month — its highest level in more than a year and almost 50 per cent above its January lows.
However, volumes for iron ore steel, steel and coking coal are waning after Chinese exchanges have raised fees and margins and regulators have issued stern warnings about the dangers of speculative trading.
Turnover in the most active iron ore contract on the Dalian Commodities Exchange (DCE) was 2.2m lots on Thursday, down from nearly 7m at the height of the trading frenzy two weeks ago. Trading in Chinese steel futures has also slowed and the price has declined.
Speaking to reporters in Australia on Thursday, the head of Rio Tinto, one of the world’s biggest iron ore producers, said the huge quantities of iron ore being traded on the DCE were impacting “people’s view of iron ore pricing”.
“Iron ore bounced up to $70 a tonne and I said I didn’t expect it to stay there … guess what — today it’s down at $60,” said Sam Walsh, Rio’s outgoing chief executive. “Some people can see a bit of an uptick, and I don’t whether its hope. You have to look at fundamentals.”
On Thursday, iron ore for immediate delivery into China was down $1.50, or 2.5 per cent, to $59.50 a tonne, according to the Steel Index, taking losses over the past two weeks to almost 14 per cent.
The steelmaking ingredient is a major source of profits for Rio and rivals including BHP Billiton and Brazil’s Vale. Every $1 a tonne move in the price can add hundreds of millions of dollars to the earnings of these companies.
Analysts say there are reasons to think iron ore will not revisit the $40 a tonne level hit in January when markets were gripped by fears of slowing growth in China.
They point out the trigger for the speculative interest in steel-related commodities was grounded in fundamentals — a credit surge engineered by Chinese policymakers earlier this year to prop up the economy and its currency.
This led to a pick-up in construction activity and stoked investor appetite for ways to bet on the Chinese economy.
“Both the physical trade and China’s speculators are responding to the year-to-date lift in credit liquidity in China’s economy,” said Morgan Stanley analyst Tom Price.
At the same time, there are signs that the biggest iron ore producers are moving to “value over volume strategies”, according to JPMorgan.
Over the past couple of weeks, BHP and Rio have both cut production forecasts while Vale has said output in 2016 will be at the low end of company guidance. Production from a major new mine in Australia called Roy Hill also appears to be running behind schedule.
“Due to tighter supply, owing to reduced capacity additions from Rio and BHP and likely Roy Hill, we now believe the downside for iron ore has moved up from our previous expectation that iron ore prices would average $40-$45 a tonne in the second half of 2016 and 2017,” said JPMorgan.
The bank now sees iron ore averaging $53 this year and $48 next year.
Source: next.ft.com