Iron ore futures plunge, expanding likelihood of a larger drop

Iron ore (4) — A processing plant can be seen at the Fortescue Metals Group (FMG) Christmas Creek iron ore mine located south of Port Hedland in the Pilbara region of Western Australia, November 17, 2015. Reuters/Jim Regan

Chinese iron ore futures sustained a downfall on Thursday evening. This raises the likelihood of spot markets showing weaker performance on Friday.

The most actively traded iron ore contract on the Dalian Commodities Exchange for September this year plunged by a margin of 5.4 percent to settle at 534.5 yuan (AU$102.93) a tonne. It is the lowest recorded reading since Jan. 10. At the same time, rebar futures also fell by 4.3 percent on the Shanghai Futures Exchange.

Chinese rebar futures saw a decline of 2 percent on Thursday. A continuing pressure imposed by increasing supply persists. Meanwhile, seasonal demand in the world's largest steel consumer has been weaker than anticipated.

Coking coal, another key ingredient used in the production of steel, slumped on the heels of a four-month maximum. The previous session saw the mineral climb by 8 percent as concerns persisted regarding limited supply following the devastating Cyclone Debbie striking Australia.

According to Metal Bulletin analysts, the decline in rebar futures came as an extension of Thursday’s price action. “China’s spot rebar prices fell on Thursday as the softening paper market put some pressure on market sentiment,” Metal Bulletin said. “The retreat in the paper market dampened buying interest in the spot market. As a result, trading was very thin in both the eastern and northern Chinese regions.”

Spot price for benchmark 62 percent iron ore fines went down by 0.76 percent to settle at US$80.92 (AU$107.51) a tonne. With this, the rise of 2.63 percent in the previous session was reversed partly.

Stockpiles of rebar, which ARE used in construction, are consistently declining. However, Richard Lu, from Beijing based CRU Consultancy, said the drop has relaxed in the last few weeks. The inventory slumped 4.5 percent last week to reach 6.73 million tonnes. Moreover, it has gone down by as much as 20 percent since February when it touched a maximum in three years, as reflected by SteelHome consultancy. According to Lu, demand is weakening and an increase in long products, including rebar, is being witnessed.

Last month, Chinese steel industry activity progressed weakly, according to an industry survey of last week. As noted by the Purchasing Managers' Index, the steel sector plunged from 51.4 in February to 50.6 in March. If weakness in iron ore futures continues to persist at the start of the trade, there is a possibility for a larger fall in spot markets on Friday.