Iron ore’s brutal collapse under $100 flags more trouble ahead

accreditation
0:00
play article
Subscribers can listen to this article
Photo: Getty
Photo: Getty
Photo: Getty

Iron ore sank below $100 a ton as China’s moves to clean up its heavy-polluting industrial sector spurred a swift and brutal collapse.

Prices have more than halved since peaking in May as the world’s biggest steelmaker intensifies production curbs to meet a target for lower volumes this year, and a sharp downturn in China’s property sector hurts demand. 

Iron ore’s slump makes it one of the worst-performing major commodities and a notable outlier in a broader boom that’s seen aluminum soar to a 13-year high, gas prices jump and coal futures surge to unprecedented levels.

A drop back to double-digits for the first time since July last year would be a relief for steel producers, but a blow to the world’s top miners that have enjoyed bumper profits during the first-half rally. It’s bad news too for top iron ore producer Australia, where the key steel-making ingredient generates about 40% of goods exports.

Iron ore futures have slumped more than 20% this week and were trading at $99.55 a ton at 9:18 a.m. in New York.

Here’s more on iron ore’s collapse and how it may ripple through markets:

Losing a digit

It’s been a stark turnaround from the first half, when steelmakers ramped up output and economic optimism and stimulus aided consumption. The rally then faltered after China began cracking down on surging commodity prices, and the decline gathered pace as authorities rolled out more measures to reduce steel production and end-user sectors like property weakened.

Iron ore’s deepening sell-off has seen volatility jump to the highest in five years, with UBS Group AG saying the decline “has played out faster than expected.” Inventories at ports are 10% higher than a year earlier and expectations for Chinese demand to soften further coincide with forecasts for global supplies to rise. UBS predicts prices will average $89 next year, a 12% cut to its previous forecast.

Steel Surge

It’s a different story for steel, where prices have stayed elevated. The market remains tight of supplies as China’s production cuts significantly outpace declining demand, according to Citigroup Inc. Spot rebar is near the highest since May, albeit 12% below that month’s high, and nationwide inventories have shrunk for eight weeks.

China has repeatedly urged steel mills to reduce output this year to curb carbon emissions. Now, winter curbs are looming to ensure blue skies for the Winter Olympics.

Measures are starting to take effect, with production dropping to the lowest in 17 months in August and declining in early September. Volumes need to fall 8.7% year-on-year in the final four months to achieve flat annual output, according to China International Capital Corp.

Major miners

Iron ore producers Rio Tinto Group, BHP Group, Vale SA and Fortescue Metals Group have seen their shares tumble. The drop in prices is likely to weigh on profit that had surged alongside the earlier jump.

The biggest producers are able to weather lower prices as their production costs can be less than $20 a ton, but smaller miners will be hit harder. Those operators tend to restart or ramp up production when the market rallies strongly, and processes such as having to truck ore from mines to ports make them more sensitive to price changes.  

Economic hit

Australia’s economy had been supported through the pandemic by surging iron ore export revenue. But the country’s growth is under increasing pressure from lockdowns in its two biggest cities and every $10 decline in the price of iron ore has a A$3 billion ($2.2 billion) to A$3.5 billion fiscal impact, according to Bloomberg Economics. 

For China, iron ore’s slump has come as authorities grapple with stemming a surge raw material costs that had stoked concerns that rising inflation would curtail growth.

- With assistance from Martin Ritchie, James McIntyre (Economist), James Thornhill and Yvonne Yue Li.

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
Rand - Dollar
14.51
+1.7%
Rand - Pound
19.88
+0.9%
Rand - Euro
16.83
+0.6%
Rand - Aus dollar
10.77
+0.6%
Rand - Yen
0.13
+0.7%
Gold
1,767.60
0.0%
Silver
23.31
0.0%
Palladium
2,075.53
0.0%
Platinum
1,059.00
0.0%
Brent Crude
84.86
+1.0%
Top 40
60,494
+0.2%
All Share
67,029
+0.3%
Resource 10
64,347
-0.1%
Industrial 25
84,819
+0.7%
Financial 15
13,961
-0.3%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Voting Booth
Facebook is facing a fresh crisis after a former employee turned whistle-blower leaked internal company research . Do you still use Facebook?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes, the benefits outweigh the risk for me
23% - 89 votes
No, I have deleted it
46% - 175 votes
Yes, but I am considering deleting it
31% - 117 votes
Vote