Iron Ore’s Collapse

The most spectacular drop in iron ore on record portends more volatility ahead as investors grapple with China’s complex policy backdrop and an uneven recovery in global demand.

A brutal five-week path for futures, combined with a 14% drop in the spot market on Thursday, has seen it lose roughly 40% of its value since the peak in May. China seeks to reduce steel production to reduce pollution.

The focus is now shifting to an uncertain consumer outlook, which raises the prospect of more abrupt, short-term movements. China’s demand shows signs of weakness, but expectations are growing that the government will turn to infrastructure to help prop up the economy. Rising virus cases are also putting a damper on growth in many parts of the world.

Benchmark Spot Ore

The price of benchmark spot ore with a 62 percent iron content fell 14 percent on Thursday. This was the most significant drop in history. Singapore futures rose 5.9 percent to $138.30 per ton on Friday, following a 12 percent drop on Thursday, but remain near the lowest since December.

We are incredibly bullish from these levels, given the anticipated steel demand recovery once China recovers from the current COVID outbreak, said Atilla Widnell, managing director at Navigate Commodities. They see strong support for iron ore at $140 per ton, and it appears to be highly oversold.

The Market

China’s sometimes contradictory policies are buffeting the market. Officials used the stimulus to boost growth, boosting demand for commodities used in infrastructure and real estate. At the same time, they sought to reduce steel output, and the prospect of a flurry of restrictions caused mills to shift production to the first half of the year.

That resulted in a rapid rise to a record for iron ore and steel.

Market participants are now attempting to determine the extent. Morgan Stanley predicted that iron ore would fall further due to China’s weak steel demand. In contrast, Kallanish Commodities Ltd. analyst Tomas Gutierrez predicted that iron ore is nearing a bottom and a weak second half-priced.

Slowing Property Sector

Nonetheless, sluggish growth may sustain iron ore demand beyond this half if stimulus measures have to keep the economy afloat. In July, China slowed more than expected, as delta outbreaks added new risks to the recovery. China raised hopes that the country will resort to more monetary and fiscal stimulus to avoid a sharper slowdown.

Steel demand will fall in the second half, as will the property sector. Still, it is unlikely to be significant, as the country has pledged to increase infrastructure investment to offset potential economic risks, said Xu Xiangchun.

Long-term supply constraints are also likely to support iron ore. Vale SA (NYSE: VALE) has been attempting to recover output since a dam disaster more than two years ago.