Over the last month of trading, iron ore prices have dropped 8.5%. This comes after a recent sell-off tied to a downturn in China’s economic growth.
The spot price for iron ore in 62% fines finished in November at US$65.95, which was marginally lower than its November peak of US$77.20, as reported by Fast Markets MB.
Iron ore price weakened by demand downturn
The weakness seen in iron ore prices this week can be linked to a widespread slowdown in Chinese economic growth.
According to (AFR), prices are also ‘reflecting last week’s bear market correction for China’s benchmark rebar steel contract.’
With little chance of rebound insight, Liberum analysts Richard Knights and Ben Davis commented in a November note (as reported in AFR):
‘We think the demand down cycle has further to go based on weakness in Chinese credit growth and expect pressure on steel prices and mill margins to intensity in the near-term,
‘With spot mill profitability hovering just above break-even for hot-rolled coil and declining quickly for rebar, the incentive to use more expensive, higher grade material is dissipating and we expect it should result in much lower iron ore grade premiums if history is any guide,’ the Liberum analysts added.
Iron ore price facing lowered 2019 forecasting
November saw a weak Purchasing Managers Index (PMI) for China, which was released on Friday. With it came a tumbling of 2019 outlooks falling short of desirable outcomes.
‘In the six years of Chinese steel PMI data, the new orders reading has only fallen into the 30s on seven occasions with the mining index falling in the following month on five out of seven with an average return of minus 3 per cent,’
However, November’s data does — according to Liberum Analysts — run the risk of cuts, most likely driven by overstocking September and October.
‘The end-game is weaker demand over the winter period. With steel mill spot profitability in China teetering around break-even, the likelihood in a big acceleration in iron ore demand in the next one-three months appears very low’.
Investors should note that iron ore’s volatility, supported by a range of factors aligning a sell-off in iron ore and steel prices now, is mostly short-term.
China’s economic slowdown isn’t recent news by any means, so it should be expected that the iron ore sector is facing downward pressure.
Despite slowing down, China’s economic state is still expanding at one of the fastest rates in the world. So investors shouldn’t be shocked to see a bit of a correction away from high prices.
More to come.
For Markets & Money