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Iron ore takes a battering as bear market engulfs China futures

Retreat follows warnings of losses from banks and producers.

Iron ore is getting battered. After rounds of warnings that this year’s rally may be overdone, the raw material is in retreat as doubts gather about the strength of demand in China as steel sells off and record port stockpiles put a spotlight on rising supplies.

In China, futures on the Dalian Commodity Exchange sank into a bear market as steel in Shanghai posted the longest run of declines this year, while the SGX AsiaClear contract in Singapore fell for a fourth day. Benchmark spot prices from Metal Bulletin are set for further losses below $90 a dry metric ton.

“Steel demand in China is clearly robust, but iron ore prices remain very elevated versus fundamentals, and it’s only a matter of time before they normalise to below $60,” Ian Roper, an analyst at Macquarie Group, said in an email. “We’ve had a negative view on prices for a while but they’ve held up longer than we expected.”

Iron ore surged last year and extended gains into 2017 amid optimism about the outlook in China, benefiting miners including Rio Tinto Group, BHP Billiton and Vale. While prices advanced, analysts as well as Australia’s central bank and even some miners flagged the potential for a pullback. Prices fell on Wednesday amid a global equity sell-off, and as China’s central bank stepped in to calm a spike in money-market rates. 

“I don’t think many investors will be surprised to see iron ore in particular give up some ground from current levels,” Ric Spooner, chief market analyst at CMC Markets in Sydney, said in an email. “Inventory levels are high and, at the same time, we are moving toward a period of seasonally weaker demand, while markets are anticipating ongoing build in seaborne supply.”



In Dalian, futures for September delivery lost 4.7% to 577 yuan a ton, the lowest close since January 9. Prices fell 15% on Tuesday as the most-active contract rolled to September, and have now lost more than 20% from last month’s closing high. In Shanghai, rebar dropped for a fifth day.

Ore with 62% content in Qingdao fell to $87.59 a dry ton on Tuesday, trimming the gain this year to 11%, according to Metal Bulletin. The benchmark peaked last month at $94.86 a ton on February 21, the highest price August 2014 amid optimism about consumption in China.

The drop has hurt miners’ shares. In Sydney, Fortescue Metals Group. tumbled more than 5%, while Rio backtracked 2.6%. In Brazil on Tuesday, Vale sank 8.5% after the stock surged more than 30% in January and extended the rally last month.

Producers and banks have flagged the risk of a decline. BHP chief financial officer Peter Beaven said this month markets should brace for much lower prices as the impact of stimulus in China slows down. With supplies expanding, JPMorgan Chase & Co sees a pullback to $60 by the year-end, while Morgan Stanley has said it remains bearish.

“It’s definitely a risk-off day,” David Lennox, a resource analyst at Fat Prophets, said by phone. On the Chinese steel industry, “we’ve had all the stories, but we haven’t yet seen the demand,” Lennox said.

© 2017 Bloomberg

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