Over-Optimism Among China Steel-Makers Behind Iron Ore’s Plunge

Iron ore lost almost a quarter of its value in a dizzying eight-day plunge through Monday. While futures in Singapore are staging a mini-recovery, the short-term outlook for the steel-making material looks grim.

The main culprits responsible for a longer-term decline from early March have been the persistent funk in China’s property market and the virus-induced slowdown in economic activity. But while other parts of Asia’s largest economy have perked up recently -- the yuan has been broadly stable and stocks are on an upward trend -- iron ore has gone into a tailspin.

The answer to that seeming disconnect may be over-optimism in China’s steel industry, which ramped up production even as Covid-19 was hobbling the economy. Crude output of the metal was around 2.7 million tons a day in January and February, but then increased to 3.1 million tons a day in April and May, Gavekal Dragonomics said in a note on Monday. 

“The decision to operate at high capacity even after lockdowns hit growth suggests firms are also betting that a rebound in infrastructure and property will sustain demand,” Gavekal analyst Rosealea Yao said in the note. “Although infrastructure spending has picked up this year, the property sector, which accounts for 39% of total steel consumption, has failed to fully recover and prospects are uncertain.”

Iron ore rose 2.7% to $113.95 a ton as of 4:09 p.m. in Singapore on Tuesday, following a 23% tumble over the previous eight sessions. Futures in Dalian climbed 0.4%, while steel rebar and hot-rolled coil advanced in Shanghai.