$50bn wiped from ASX as iron ore rout hits miners

Investors wiped $50bn off the local sharemarket on Monday as a rout in iron ore prices continued amid steel production cuts in China.

In its biggest fall since February, the S&P/ASX 200 share index closed down 155.6 points or 2.1 per cent after diving as much as 2.3 per cent to a two-month low of 7233.6. Picture: NCA NewsWire/Nikki Short

Investors wiped $50bn off the local sharemarket on Monday as a rout in iron ore prices continued amid steel production cuts in China, while global markets fretted over a potential collapse of China’s biggest property developer and the outlook for US monetary policy.

In its biggest fall since February, the S&P/ASX 200 share index closed down 155.6 points or 2.1 per cent after diving as much as 2.3 per cent to a two-month low of 7233.6.

It was the lowest daily close in the past three months.

After rising as much as 73 per cent from a March 2020 low of 4402.5 to a record high of 7763.8 points last month, the bourse has fallen 5 per cent, its biggest pullback since October 2020.

“The slow motion train wreck of the Evergrande collapse has taken front and centre stage, as the risk of financial contagion in Chinese markets looms large,” said IG market analyst Kyle Rodda.

“It’s a ‘shoot first and ask questions later’ environment, that’s seen volatility exacerbated by the fact that China’s financial markets, along with that of Japan’s, were offline for public holidays.”

Evergrande shares fell 13 per cent in Hong Kong amid expectations that it won’t meet bank interest and bond coupon payments this week and the Hang Seng index dived 3.6 per cent.

The big miners and banks did most of the damage to the Australian market.

BHP fell 4.4 per cent to $37.53, Rio Tinto fell 3.6 per cent to $95.24 and Fortescue Metals fell 3.7 per cent to $14.70. Fortescue fell 12 per cent on Friday after UBS cut its rating to sell and slashed its target prices for all three miners as it predicted that iron ore would revert to $US65 a tonne.

CBA fell 2 per cent to $100.81 and Macquarie Group fell 3.6 per cent to $173.69.

A 0.9 per cent fall in S&P 500 futures added to bearish leads from Wall Street after US consumer confidence data showed consumers remain cautious about the pandemic and inflation.

The Fed is expected to reiterate a desire to start reducing its stimulus when its meeting concludes early Thursday Australian time. The minutes of the Reserve Bank’s board meeting are due Tuesday.

Construction work has been halted at Evergrande Cultural Tourism City, a mixed-used residential-retail-entertainment development, in Taicang, Suzhou city, in China's eastern Jiangsu province. Picture: AFP

After plunging 21 per cent last week amid news that China’s steel production suffered its biggest monthly fall since 2008 because of production cuts aimed at curbing pollution in China, iron ore futures in Singapore fell as much as 11.6 per cent to $US90 a tonne amid reports of more cutbacks. The futures were down 10 per cent at $US91.60 a tonne when the local market closed.

In an indication that China has continued to follow through with its plan to cap its steel production in 2021 at its 2020 level, steel mills in Jiangsu province were told to cut production as part of broader curbs on industrial activity aimed at lowering power usage, Mysteel said, based on a survey of mills.

The cuts were focused on construction steel and due to run until mid-October.

Producers in Zhejiang province were told to limit operations through September.

It came after another new province, Yunnan, was targeted last week with mill producers tasked to restrict output on steel, aluminium and other materials, according to ANZ.

“There were also rumours that the central government is asking mills to bring production back to 2020 levels by November instead of December,” said ANZ senior commodity strategist, Daniel Hynes. “Mills will be forced to delay some September output to November and December.

“Rationed power demand is another pressure building up for smelters.”

There will be no iron ore spot price until Wednesday.

Spot iron ore has fallen almost 60 per cent after hitting a record high of $US233 a tonne in May.

While China’s intensifying effort to reduce steel output in order to curb carbon emissions has been the main driver, the iron ore price fall has been compounded by the risk of a substantial slowdown in the China property following the Evergrande Group crisis.

Evergrande, which has over $US300bn of debt, was considered to be at risk of default on interest payments on two of its bonds this Thursday, albeit the payments, including a $US83.5m of interest on an 8.25 per cent, five-year dollar bond, and a 232 million yuan ($36m) coupon on an onshore bond, have a 30-day grace period before a missed payment is considered to be in default.

Evergrande was also due to pay interest on bank loans Monday, with a one-day grace period, and Chinese authorities told lenders not to expect payment, according to news reports last week, and talks to consider the possibility of extensions and rolling over some loans were underway.

“With Beijing reluctant to intervene with a bailout, the best-case scenario for Evergrande’s bond investors is a restructuring of its debt,” said Saxo Bank senior fixed income strategist, Althea Spinozzi. “A liquidation could also be an option, but it would be a much longer process.

“A default of Evergrande poses a severe threat to the Chinese real estate market and smaller banks. However, we expect it to be limited to the Chinese market.”

AusNet Services rose 19 per cent to $2.36 after receiving a $9.58bn takeover bid from Brookfield Asset Management, pitched at $2.50 a share bid.

Ale Property rose 21 per cent to $5.68 on a $1.7bn bid from a Charter Hall consortium.

Transurban was halted for a capital raising after mopping up WestConnex for $10bn.

Originally published as $50bn wiped from ASX as iron ore rout hits miners