Iron ore tumbles 20% in worst week since 2008 financial crisis

Commodities updates

Iron ore has endured one of its worst weekly performances on record as Chinese steel mills dumped the commodity in response to government production curbs and a cooling property market.

The steelmaking raw material, which hit a record high above $230 a tonne in May, traded at $100.80 on Friday, down 22 per cent over the week, according to a price assessment by S&P Global Platts.

The last time it suffered a sell-off of this magnitude was during the financial crisis in 2008, analysts said.

Beijing wants its vast steel industry to hold production flat at just over 1bn tonnes this year in an effort to slow its steel-intensive economy, which has recovered strongly since the earlier stages of the pandemic.

Amid simmering diplomatic tensions with Australia, the world’s biggest producer of iron ore, the Chinese government is taking a more active role in curbing steel output as the year’s end approaches, according to analysts and traders.

“It’s quite a brutal policy to roll out,” said Tom Price, analyst at Liberum, a London-based brokerage. “No one believed they would do it but it looks like they are going to.”

Although Chinese crude steel production dropped in July and August by 8 per cent and 12 per cent respectively, it is still up 5 per cent in the year to date on 2020, suggesting deeper cuts to come if Beijing is to hit its target.

“The production cuts really seem to be working,” said Erik Hedborg, lead iron ore analyst at consultancy CRU. “Demand for additional volumes is simply not there any more.”

The curbs had prompted Chinese steel mills to panic sell, traders said, with a view to reducing their iron ore inventories by dumping contracted cargoes into the secondary market at big discounts.

Another factor weighing on iron ore is the property market in China, where construction activity is expected to slow in the fourth quarter and into 2022.

Analysts say the liquidity crisis at Evergrande, China’s most indebted property company, could lead to credit being rationed for other developers.

“The real estate sector is a major concern,” said Hedborg. “Evergrande is something people are watching closely in China as a leading indicator for construction activity going forward.”

The dramatic collapse in the iron ore price will also have a big impact on major mining houses, which have been paying record dividends to shareholders on the back of booming profits from their iron ore businesses.

Shares in Anglo American and Rio Tinto endured the largest falls on London’s FTSE 100 index on Friday after UBS slashed its earnings forecasts and advised clients to sell.

“Iron ore supply has been broadly stable in 2021 but will lift over the next few months if Vale and Rio Tinto are able to achieve their 2021 guidance,” said UBS analyst Myles Allsop. “This will result in a material build [up] in iron ore inventories at Chinese ports and a sharper fall in iron ore prices over the next six months than previously expected.”

The dramatic decline in the price of iron ore comes as the price of coking coal, the other ingredient needed to make steel, hits record levels in China due to a supply crunch.

The domestic coking coal price reached $577 a tonne on Friday, up almost 60 per cent in the past month. Covid-related supply disruptions have hit imports from Mongolia, while Australian coal cannot enter China because of a ban imposed by Beijing.

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