Iron Ore Prices Plunge on Reduced Steel Margins and Supply Glut

Iron ore prices are plunging as Chinese steelmakers offload inventories due to declining steel margins.

China’s steel prices fell 5% yesterday, pushing the sector into a bear market. The most actively traded rebar contract hit its lowest point since 26 June, and has lost 21% since August.

These reduced margins have had a flow on effect to iron ore prices.

As per Business Insider:

The spot price for benchmark 62% fines tumbled 8.4% to $64.25 a tonne, its largest one-day percentage drop since April 12 last year.

The benchmark has now fallen for five consecutive sessions, losing a mammoth 15.6% in the process, leaving it at the lowest level since July 17.’

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Headwinds for all grades of iron ore

Below is a chart which tracks the spot price of four different grades:

Fastmarkets MB Daily Iron Ore Indices December 2017-November 2018

Source: mining.com

65% Brazilian fines have been hit hard as steelmakers opt for lower grades, seeking a bigger margin.

Meanwhile, all grades face strong headwinds going into winter production curbs.

These sharp falls are not a complete surprise as the Baltic Dry Index (BDI) has been pointing to this for the past week:

Baltic Dry Index

Source: Bloomberg

Increased steel supply driving prices lower

Another key part of the story here comes from the increased competition China is currently facing.

US steel output in October was up 10.5% compared to last year at the same time. Meanwhile, India is on course to muscle out Japan from the number two spot on the global steel producers list, with output growing 5.5% from January–September.

So in many ways what’s happening here is a combination of factors specific to China, with a supply story as the backdrop.

While it is still possible that greater Chinese stimulus will kick in over the next few months, it does look a bit grim for the price of iron ore over the next two months, at least during the peak of winter.

Regards,

Lachlann Tierney,
For Markets & Money

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Lachlann Tierney is a writer for Markets & Money. He has lived and studied in the US, the UK, and Australia. With an MSc from London School of Economics (LSE) he brings a strong grasp of geopolitics and world affairs to his analysis. Lachlann is always on the lookout for the news that will give you an edge in tomorrow’s markets.


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