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Iron ore prices made headlines again after falling below the psychological barrier of US$100 per tonne on Monday. It was the fourth time they crossed that threshold in two weeks. This latest drop was almost 30% below the peak of US$144 per tonne that iron ore reached in January this year. As a result, Singapore futures fell 1.7% to US$99.40 per tonne by Monday afternoon.
According to a Reuters The report said the sixth consecutive week of declines was due to problems at Chinese steel mills, while inventories of the raw material at ports remained stagnant. The report added that the benchmark Singapore futures contract had fallen every week since July 5.
Many analysts have already predicted that iron ore prices will be significantly lower for the rest of 2024 due to the ongoing downturn in China’s construction sector, which has led to a sharp decline in steel prices. This collapse has rendered many steel mills unprofitable, making them even more reluctant to buy iron ore.
A labyrinth of market risks for iron ore prices
Iron ore was one of the worst performing major commodities of the year, losing over 25% in value. The only bright spot in the story is Australiawhere iron ore was still trading at around US$100 per tonne despite the problems with China. However, Australia’s own Department of Industry, Science and Resources recently published a forecast predicting that prices fall to about $96 per tonne by the end of this year.
Here too, much of the fresh Decline in iron ore prices The reason for this is the deteriorating situation of Chinese steel mills, which are crucial for price formation. As steelmakers are intensely focused on maximizing profits and minimizing losses, a significant deterioration in their margins has led to a renewed decline in iron ore prices.
Goldman Sachs warns of looming supply crisis
The Reuters report mentioned above quoted a Goldman Sachs analyst as saying that the market needs to see a drop in supply to prevent further oversupply as iron ore consumption continues to fall, adding that a price below $100 is likely to need to trigger a sufficient supply response.
Meanwhile, the dire financial situation of China’s steel mills is becoming clearer with each passing day, with hardly any plant reporting profits. This precarious situation could lead to further reductions in production and exacerbate downward pressure on iron ore prices. Steelmakers’ margins had already fallen to their current levels and even lower in the first quarter. The price peaked in January 2024 and fell to a low of $98 per tonne in April as the industry struggled to maintain profitability.
Attempts to revive the Chinese economy continue to fail
China has tried almost every trick in the book to revive its economy, including cutting interest rates. But even this has met with a muted response in commodities that usually benefit most from such measures, such as iron ore. A few weeks ago, the People’s Bank of China cut the seven-day repo rate from 1.8% to 1.7%, before subsequently cutting benchmark interest rates by the same amount.
Despite this significant move – the first comprehensive rate cut since August 2023 – there was only minimal demand growth for iron ore and copper, which remain closely linked to China’s construction and manufacturing sectors.
Bearish iron ore prices meet China’s hunger for supplies
Obviously, iron ore prices continue to move into a bear market. While countries like India continue to complain heavily about cheap Chinese steel exports flooding their domestic markets, China’s iron ore imports reached about 612 tons, representing an increase of about 6.8% in the first half of 2024 compared to the same period in 2023.
Still, some analysts claim the ore had nothing to do with steelmaking, but was instead used to replenish stocks. Some proponents of this theory, such as Reuters columnist Clyde Russellexplained that the unclear patterns in China’s rather large and unexplained commodity imports in the first half of 2024 were influenced by price changes rather than economic indicators.
By Sohrab Darabshaw
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