Iron ore and base metals were in full-blown retreat on Tuesday following a rapid surge that had spurred warnings from banks including Goldman Sachs Group that the ascent happened too suddenly and was at risk of reversing.
The SGX AsiaClear iron ore contract for December settlement sank as much as 11% to $67.62 a metric ton and was at $70 at 4:25pm local time. The price jumped 27% last week, and briefly topped $80 on Monday, the highest since 2014. In London, three-month copper lost as much as 3.6% to $5 360 a ton as the five other main base metals also dropped.
Iron ore and metals have rallied to multiyear highs on a combination of speculative interest in China following signs the economy is holding up, and optimism on demand prompted by Donald Trump’s surprise election victory. Goldman said in a report on November 11 iron ore and copper’s reaction to the Trump win was excessive, while Capital Economics warned iron ore is set to face growing pressure on rising supply.
“After the sharp gains in ferrous and base metals, a correction’s inevitable,” said Huang Huiwen, an analyst at Shanghai Cifco Futures Co. in Shanghai. “Just as prices were driven up by speculation, the decline we’re seeing now has to do with funds scaling back as investors are wary the rally’s overdone.”
Metals prices have strengthened in recent days following the US election even as the dollar has advanced on optimism about US growth and prospects for higher interest rates. The Bloomberg Dollar Spot Index rose 2.8% last week, making raw materials priced in the greenback more expensive for holders of other currencies.
“The surge in the dollar will ultimately put pressure on base metals,” Zhu Wenjun, an analyst at Citic Futures Company, said by phone from Shanghai. “The spot market failed to absorb the radical increase in prices. Purchasing has slowed. Some small copper users are even said to have halted production after price increases caused losses.”
After Trump’s unexpected win, the President-elect talked up his plans for rebuilding US infrastructure by constructing roads, bridges and airports. Goldman’s report noted that the world’s largest economy accounts for only 7% of global steel demand and 8% of worldwide copper demand. The surge has been “too much, too fast,” it said.
Ore with 62% content in Qingdao jumped to $79.81 a dry ton Friday, the highest since October 2014, after doubling from a low in December, according to Metal Bulletin. The price fell back to $77.77 on Monday, and the losses in futures in Asia signal the likelihood of a further decline on Tuesday.
Iron ore slumped as China again signaled it’s stepping up moves to reduce steelmaking capacity. Ten steelmakers in the industry hub of Tangshan in northern China will merge, creating a company with 8 million tons of annual crude steel capacity after 5.4 million tons is shut down. China’s government has pledged to reduce the nation’s capacity by as much as 150 million tons by 2020 to less than 1 billion tons in an effort to streamline the industry as demand growth moderates.
© 2016 Bloomberg