(Bloomberg) — Iron ore proved to be one of the most bullish commodity trades of 2020; this year’s turning out a little different. Futures tumbled on Thursday, erasing year-to-date gains, after a vow by China to roll back steel production sent a shudder through the global market.
Futures in Singapore fell for the fourth day in five, set for the lowest close in six weeks, as investors questioned whether the robust demand that’s hoisted prices to multi-year highs would be sustained. This week, China reinforced plans to ensure steel output will fall this year. The salvo came just as mills face a slump in profit margins, the dollar rose, and top miners plan to add supplies.
Iron ore surged more than 70% last year as construction-led stimulus in China to fight the fallout from the pandemic spurred demand, with mills churning out steel at a record pace. On Tuesday, Beijing restated a pledge to cut back on steel production this year. The country’s mammoth industry sets the tone in the global seaborne market, and it is the largest iron ore importer by far.
While last year closed with a bang for ferrous commodities, there are now a few reasons for caution, Macquarie Group Ltd. said in a note, citing a retreat of steel prices in China, negative margins for mills, and higher coal prices. Iron ore dropped as much as 6.9% to $151.85 a ton on the
Singapore Exchange, and traded at $154.50 at 5:05 p.m., set for the lowest close since mid-December. In Dalian, the most-active contract retreated, while rebar and hot-rolled coil slid in Shanghai. Miners’ shares including BHP Group, Rio Tinto Group and Fortescue Metals Group Ltd. all fell in Sydney.
China produces more than half the world’s steel, and nationwide output has risen almost every year since the turn of the century. In 2020, the total topped 1 billion tons. But China’s now pushing measures to speed up a reduction in steel supply, including a strict ban on illegal additions of new capacity.
There are also concerns among traders about repercussions from a recent uptick in virus cases in parts of China, and the authorities’ measures to nip outbreaks in the bud by restricting movement in some locales. China’s northern regions, a key steel-producing region, have seen more than 1,700 cases.
“Steel producers are struggling to distribute material to stockists due to Covid-19-related travel restrictions, particularly in Hebei,” said Atilla Widnell, managing director of Navigate Commodities. That’s led to a significant build-up of inventories, said Widnell.
Still, leading miners remain optimistic about the outlook even as they plan to add tons this year. Australia’s Fortescue, which reported production data on Thursday, said that it’s seeing continued robust demand from Chinese mills. Its quarterly shipments rose 5%.
To contact the reporter on this story:
Annie Lee in Hong Kong at [email protected]
To contact the editors responsible for this story:
Phoebe Sedgman at [email protected]
Jake Lloyd-Smith, Alpana Sarma