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Iron ore had one of its worst weekly performances on record, as Chinese steel mills discontinued the product in response to government production restrictions and a cooling housing market.
The steel commodity, which hit a record above $ 230 a tonne in May, was trading at $ 100.80 on Friday, down 22% on the week, according to a price assessment by S&P Global Platts.
The last time it suffered a liquidation of this magnitude was during the 2008 financial crisis, analysts said.
Beijing wants its vast steel industry to keep production at just over a billion tonnes this year in a bid to slow its steel-intensive economy, which has recovered sharply from the early stages of the pandemic.
Amid latent diplomatic tensions with Australia, the world’s largest producer of iron ore, the Chinese government is taking a more active role in cutting steel production as the end of the year approaches, according to analysts and traders.
“It’s a pretty brutal policy to deploy,” said Tom Price, analyst at Liberum, a London-based brokerage house. “No one believed they would do it, but it looks like they are going to do it.”
Although Chinese crude steel production fell 8% and 12% respectively in July and August, it is still up 5% since the start of the year compared to 2020, pointing to further reductions. important to come if Beijing is to achieve its goal.
“The production cuts seem to be really working,” said Erik Hedborg, senior iron ore analyst at consultancy CRU. “The demand for additional volumes is simply no longer there. “
The restrictions have prompted Chinese steel mills to panic, traders said, in an attempt to reduce their iron ore inventories by throwing contract cargoes into the secondary market at heavily discounted prices.
Another factor weighing on iron ore is the real estate market in China, where construction activity is expected to slow in the fourth quarter and into 2022.
Analysts believe the liquidity crunch at Evergrande, China’s most indebted real estate company, could lead to credit rationing for other developers.
“The real estate sector is a major concern,” Hedborg said. “Evergrande is something people are watching closely in China as a leading indicator of construction activity going forward.”
The dramatic collapse in the price of iron ore will also have a big impact on large mining companies, which have paid record dividends to shareholders thanks to the booming profits of their iron ore businesses.
Shares of Anglo American and Rio Tinto suffered the biggest drops in London’s FTSE 100 index on Friday after UBS lowered its earnings forecast and advised clients to sell.
“Iron ore supply has been broadly stable in 2021 but will increase over the next few months if Vale and Rio Tinto are able to meet their 2021 forecasts,” UBS analyst Myles Allsop said. “This will result in a material construction [up] iron ore inventories in Chinese ports and a steeper decline in iron ore prices over the next six months than expected. “
The dramatic drop in the price of iron ore comes as the price of coking coal, the other ingredient needed to make steel, hits record levels in China due to a supply shortage.
The domestic price of coking coal hit $ 577 a tonne on Friday, up nearly 60% last month. Covid-related supply disruptions have affected imports from Mongolia, while Australian coal cannot enter China due to a ban imposed by Beijing.