Miners dented and ASX drops as iron ore prices plummet

Iron ore miners dropped to multi-month lows and the ASX suffered its first four-day fall in 10 months as a damaging sell-off in iron ore prices accelerated.

Major miners were hit hard as the bear market in iron ore prices threatened to turn into a bloodbath.

Iron ore miners dropped to multi-month lows and the Australian sharemarket suffered its first four-day fall in 10 months as a damaging sell-off in iron ore prices accelerated and Wall Street wobbled after the US Federal Reserve sounded hawkish while noting Covid-19 risks.

BHP dived 6.4 per cent to a six-month low of $44.67, Fortescue Metals tumbled 6.2 per cent to $19.93 and Rio Tinto slid 5.7 per cent to $107.17 as the bear market in iron ore prices threatened to turn into a bloodbath.

Australia’s S&P/ASX 200 share index fought back from a 1 per cent intraday fall to close down 0.5 per cent at a three-week low of 7564.6 as CSL, Wesfarmers and James Hardie rose.

But after falling as much as 8 per cent before the local market closed, Singapore iron ore futures plunged to an eight-month low of $US134 a tonne in early Euro­pean trading.

At that point, the price of Australia’s biggest export was down more than 10 per cent in a day.

Iron ore futures are down 17 per cent in three days and 36 per cent in four weeks as China ramps up its efforts to lessen pollution by reducing steel production and supply-chain disruption caused by China’s zero tolerance policy towards Covid-19 threatened to crimp global growth.

The steep falls continued on Friday (AEST), with iron ore spot prices down 14.9 per cent to $130.20 a tonne.

It came as West Texas crude futures plunged 3.2 per cent to a three-month low of $US63.33 a barrel and Comex copper futures dived 3 per cent to $US3.99 a pound.

The sell-off in commodities may hit Wall Street as S&P 500 futures fell 0.8 per cent. It also hit forex markets, with the Australian dollar down more than 1 per cent US71.5c.

Iron ore price declines re-­accelerated this week after cautionary comments from BHP.

“The increasing likelihood of stern cuts to steel output in China in the current half-year, as affirmed by China’s peak body in August, is testing the bullish resolve of the futures markets,” BHP’s vice-president of market analysis, Hugh McKay, wrote in a report on Wednesday.

“Prices have decreased materially in late July and August, but they remain high relative to history at around $US160/t at the time of writing.”

Iron ore futures are down 17 per cent in three days and 36 per cent in four weeks as China ramps up its efforts to lessen pollution by reducing steel production.

CBA analyst Vivek Dhar said the fall in iron ore prices was mainly being driven by demand concerns linked to China’s steel output restrictions.

“Steel mills in China are tolerating lower-grade ores with higher impurities as their objective is now cost minimisation over maximising productivity,” he said.

RBC analyst Sam Crittenden said the release of Chinese crude steel production data for July showed the “first major impacts” of production curbs.

“These restrictions continue to translate into iron ore weakness despite weak supply recently,” he said. “However, supply is set to improve, while inventories in China remain high, so prices could remain under pressure until underlying demand improves.”

Metallurgical coal remained resilient in the face of these production cuts.

Chinese met coal surged to about $US100 tonne, or 32 per cent in the last four weeks, including 9 per cent since last Wednesday, as supply in the country remained “extremely tight”.

“In the near term, improving Indian demand post-monsoon season should be supportive of prices,” Mr Crittenden said.

“However, looking further out, improving supply remains a downside risk to prices, with Platts now reporting that China is reducing restrictions on coal mines, which should ease some of the current tightness.”

 

Meanwhile, demand weakness as a result of Chinese steel production cuts continued to lower iron ore prices, with blast furnace utilisation in China at about 75 per cent versus 84.7 per cent in the US.

Seaborne supply was weakened by performance issues and maintenance at an Australian port in the past week, but maintenance work was completed and shipments resumed on August 17.

Chinese steel traders were in “wait-and-see mode” regarding production cuts, but demand was relatively thin, with steel inventories only falling slightly in recent weeks.

“This is partially offset by weak production, a sign that production cuts are working to curb supply,” Mr Crittenden said.

July steel production in China was 87 million tonnes versus 94 million in June and 93 million in July 2020.

UBS analyst Myles Allsop said China was achieving its targets as crude steel production in July fell 7 per cent year-on-year to its lowest daily rate in 15 months and its 10-day data suggested crude steel production weakened further at the start of August.

In addition to benchmark 62 per cent iron ore fines prices falling about 25 per cent from early July to mid-August, pellet premium fell 40 per cent and lump premium lost 65 per cent while freight rates rose 20-30 per cent.