(Bloomberg) — Iron ore prices have taken another big hit as prolonged turbulence in China’s property sector continued to hammer bulk commodities.
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Iron ore in China sank to the lowest close in nearly three years, accelerating its decline from record-highs earlier in 2021. It’s a similar outlook for other commodities such as coal, and for the cost of shipping bulk goods around the world.
Bulk commodities are suffering from slowing growth and weaker industrial production in the world’s biggest consumer of raw materials. Fears over the real estate market deepened this week amid a bond rout, and another round of liquidity pressures for embattled developer China Evergrande Group. Meanwhile, energy prices continue to recede after the government’s success in reining in the coal market.
The recent retreat marks a big turnaround for bulk markets after demand was supercharged by the climax of China’s pandemic-era stimulus measures and a global energy crunch. Now, Beijing’s de-leveraging drive in property and a wider economic slowdown are pummeling sentiment.
Iron ore sank 4.4% to the lowest close in nearly three years in China, falling by about two thirds from its record-high in May. Chinese coal futures have almost halved in the past month. That’s also seen shipping rates plummet. The Baltic Dry Index, a measure of the cost of moving everything from crops to raw materials, has dropped about 50% since early October.
“The property sector is facing weak sales and tighter funding, so there isn’t much incentive to ramp up construction work,” Ban Peng, an analyst at Maike Futures, said by phone. “If steelmakers start restocking for the winter season, iron ore prices could maybe recover, but we are lacking a fundamental driver for a big rebound.”
Read more: Rolling update on Evergrande and China property turmoil
The steel supply chain is showing signs of slackness. Output from major Chinese mills shrank nearly 20% toward the end of October. Iron ore inventories are at their highest since April 2019, and mill margins are under pressure as steel prices slide.
How Far?
There’s uncertainty over how long Beijing’s stress-test of the property market will last, and how far policy makers will go to rein in a sector that’s been a vital engine of China’s economic growth. Goldman Sachs Group Inc. says the government’s tolerance for short-term economic pain is much higher than before.
“Without any policy stimulus, the consumption outlook of construction materials remains gloomy going forward,” Huatai Futures wrote in a note. Steel consumption has dropped significantly amid weaker sentiment and colder weather, it said.
In real estate, investors are waiting to see if Evergrande can meet its biggest payment test yet with $148.1 million of coupon payments due Wednesday. Meanwhile, a report from the official Securities Times that China may ease funding rules for domestic real estate companies helped buoy sentiment, and pare some losses in the ferrous market.
Iron ore futures in Dalian closed at 536.5 yuan a ton, the lowest since January 2019. Futures in Singapore fell as much as 6.9% to $84.6 a ton before trading at $87.90 by 4:04 p.m. local time. Rebar and hot-rolled coil retreated in Shanghai.
The raw material’s decline has already hurt major miners. Rio Tinto Group shares were at the lowest since May 2020 in Australia, Brazil’s Vale SA has lost nearly 40% since the start of August.
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