Iron Ore’s Record Rout Threatens Surge in Volatility to Come

Iron ore’s most spectacular collapse on record portends more volatility to come as investors grapple with a complex policy backdrop in China and an uneven recovery in global demand.

Once one of the hottest commodities in this year’s raw-material boom, iron ore’s ructions swiftly made it one of the most volatile. A brutal five-week rout for futures, and a 14% slump in the spot market on Thursday, has seen it lose about 40% of its value since May’s record as China seeks to reduce steel production to curb pollution.

Attention is now turning to an uncertain outlook for consumption, raising the prospect of more sharp, short-term moves. China’s demand is showing signs of faltering, though expectations are building that authorities may turn to infrastructure to help prop up the economy. And rising virus cases are weighing on growth in many parts of the world.

Benchmark spot ore with 62% iron content plunged 14% on Thursday, its biggest loss ever. Futures in Singapore rose 5.9% to $138.30 a ton on Friday following Thursday’s 12% slump, but remain near the lowest since December. 

“We are massively bullish from these levels given the anticipated steel demand recovery once China overcomes the current Covid outbreak,” said Atilla Widnell, managing director at Navigate Commodities. “We see strong support for iron ore at $140 a ton and it actually looks incredibly oversold.”

The market is being buffeted by sometimes conflicting policies in China. Officials had turned to stimulus to boost growth, fueling demand for commodities key to infrastructure and property. At the same time, they sought to cut steel output and expectations for a flurry of restrictions saw mills front-load production to the first half.

That saw a swift run-up to a record for iron ore and steel, with the resulting inflationary pressures leading to a crackdown on commodities speculation, tighter credit and a moderation in spending on construction.