Pollution a Smoke Screen for Plummeting Iron Ore Prices

Iron ore spot prices in China plummeted for the third week. During the past three weeks 62% Fe fines dropped by 6 percent and 58% Fe by 5 percent, according to data compiled by The Steel Index (TSI). Since the beginning of the year iron ore has fallen by 12 percent and is at the lowest price level since July 2013.

According to the Chinese government, concern over pollution is responsible for the idling of steel mills as the government pushes its environmental agenda. However, other reports, including those from a Steel Market Update (SMU) iron ore trading source, say mills are trying to produce as much steel as possible (since steel can be used as collateral) but are having issues repaying their outstanding loans. Bad debt is impacting the spot iron ore prices as some mills are forced to cease production due to a lack of funding.
 
There is too much ore sitting at the ports in China. According to Reuters there are 102.7 million metric tons (113.2 net tons) of ore as of this past Monday. This represents growth of 1.8 million metric tons from the prior week. Reuters reported, “The sustained increase in stockpiles reflected arrivals of iron ore contracted by Chinese mills under long-term deals with miners, traders said, as well as the growing use of the commodity as a loan collateral amid tight credit conditions.”  In addition, Australia’s Port Hedland reported a 36 percent increase in iron ore exports (21.34 million tons this quarter) to China this February, compared to last year’s 15.66 million.  
 
As SMU has reported recently, the ore “bubble” has been inflating for some time now and it is only a matter of time before the bubble will burst. Seasonal construction in China is expected to improve demand during March but, for the time being, activity is slow.  Mills are watching to see if prices dip down even further, possibly another USD 5 per metric ton to USD 10 per metric ton between now and the end of March.