Iron ore players hit as China steel mills feel the price pinch
Iron ore stocks fell sharply on Wednesday as analysts noted China’s steel mills were under pressure to maintain profit margins.
Iron ore stocks fell sharply on Wednesday as analysts noted China’s steel mills were under pressure to maintain profit margins due to bans on Australian metallurgical coal, flagging a potential hit to iron ore prices amid fresh curtailments of steel production ahead of Chinese New Year celebrations.
Fortescue Metals fell 6.4 per cent, or $1.62, to $23.68 as investors took profits off the table following a strong recent run from Australian iron ore majors, with BHP down $1.57, or 3.4 per cent, at $45.05. Rio shares were off $4.72, or 3.9 per cent, at $117.05.
RBC analyst Kaan Peker noted on Wednesday that China’s ban on Australian metallurgical coal was putting pressure on the profit margins of the nation’s steel mills, with Chinese customers now paying $US215 a tonne for coking coal.
Hard coking coal sold from Queensland ports is fetching just under $US120 a tonne this week, according to Fastmarkets data.
But with iron ore prices still as around $US165 a tonne, Mr Peker said the profitability of Chinese steel mills had turned negative over the past week, given the high costs of raw materials and weak steel prices.
“This week metallurgical coal pricing was the key contributor to reduced week-on-week mill profitability,” he said. “This is the second week of significant price rises, up $US41 a tonne over the last fortnight with Chinese metallurgical coal prices above $US215 a tonne due to the ongoing coal import restrictions.”
The closure of steel transport infrastructure in China’s Hebei province due to pandemic transport restrictions had forced some steel mills to suspend blast furnace operations, Mr Peker said, with other mills in northwest China closing due to cold conditions.
But while developments in China may have helped spook local investors in iron ore stocks, there was little sign of any major movements in futures markets on Wednesday, with the most active contract traded on China’s Dalian exchange down 0.3 per cent in the early evening, and contracts traded on the Singapore exchange down 0.1 per cent at $US168.50 a tonne.
The soaring price of iron ore over the past few months has raised expectations of a bumper dividend season from the big miners.