Chinese Steel Slowdown Slams Iron-Ore Prices
03 September 2019 - 08:35PM
Dow Jones News
By Rhiannon Hoyle and Joe Wallace
Iron-ore prices posted their biggest one-month fall in almost
eight years as China's huge steel engine cools and global shipments
of the commodity rise.
The price fell 27% to $85.85 a metric ton by the end of August,
the most since October 2011, according to S&P Global Platts.
The collapse was triggered by global trade tensions after President
Trump threatened to impose new tariffs on Chinese goods, some of
which went into effect Sunday. The drop deepened amid sluggishness
among the Chinese mills responsible for producing more than half
the world's steel, and concerns over future demand.
While the decline in prices eases pressure on steelmakers by
reducing the cost of a key ingredient, it will erode the profits of
large miners including BHP Group Ltd. and Rio Tinto PLC. The
outlook for the commodity's price meanwhile remains muddy, with
market-watchers waiting for signals in China's robust property
market and Beijing's efforts to stimulate economic growth for signs
of a rebound.
"The violence of it has surprised me," said Serafino Capoferri,
a commodity strategist at Australian investment bank Macquarie. "I
wasn't expecting such a plunge."
August's dive almost erased a rally that pushed the market as
high as $126 a ton in July, although prices have edged up to $91 a
ton in recent days on better Chinese economic data, looser curbs on
some steel production there and hopes of further stimulus.
Analysts are divided on where iron-ore prices head next.
Both of the forces that drove a surge in iron-ore prices at the
start of 2019 have eased. Chinese steel production fell in June and
July, albeit from record rates, and supplies of iron ore have
picked up, particularly from Brazil.
Vale SA, historically the industry's top exporter, suspended a
big chunk of production following a deadly dam collapse in January,
but restarted some operations in June and plans to gradually resume
more over the remainder of this year.
Chinese mills, which buy seven in every 10 tons of iron ore
traded world-wide, have been buffeted on a number of fronts. The
nation's trade war with the U.S. has rattled confidence in the
outlook for China's already-slowing economic growth. The mills also
face weaker profit margins, a depreciating yuan and environmental
restrictions, all of which have exacerbated the conventional summer
lull in steel demand.
A slowdown in China's housing market -- which accounts for
roughly 40% of China's steel demand -- may push iron-ore prices as
low as $50 a ton in the not-too-distant future, according to
Liberum. The investment bank says that infrastructure projects
designed to jump-start economic growth won't use enough steel to
offset a fall in real estate activity.
By contrast, Goldman Sachs sees iron-ore prices rebounding to
$115 a ton within three months. Ample financing will be available
to support property investments this year, and new Chinese
building-design standards require the use of more steel, the Wall
Street firm said.
The bank predicts that the international iron-ore market will
log its first supply deficit in seven years, and the widest since
at least 2000.
Iron ore's drop, however temporary, offers some relief for
steelmakers, which were grappling with sharply higher prices for
the raw material at a time when steel prices were softening. U.S.
Steel recently said it was struggling with rising raw-material
costs in Europe as it idled one furnace on the continent and two in
the U.S.
Booming iron-ore prices have boosted earnings at BHP and Rio
Tinto, the world's two largest listed miners by market value, and
enabled them to lavish cash on shareholders.
"We are not walking away from the fact that we do expect China
to slow slightly, but we are also expecting infrastructure to come
through a bit more strongly in the second half," Chris Salisbury,
chief executive of Rio Tinto's iron-ore division, said in a recent
interview. "We are cautiously optimistic."
BHP is expecting more jolts, saying it could take up to three
years for iron-ore supply to normalize from recent disruptions.
Reporting a doubling of annual profit, the miner said "prices are
likely to be volatile as that adjustment plays out."
Both miners declined to comment further on the impact of falling
prices. But even with the August drop, prices remain above
long-term averages. Rio Tinto's margin on Australian iron-ore sales
broke above 70% in the first half of 2019.
The end of summer may herald higher steel output once again,
said Argonaut Securities analyst Helen Lau. "If production starts
to recover, iron-ore prices may also be able to recover a bit," she
said.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Joe
Wallace at Joe.Wallace@wsj.com
(END) Dow Jones Newswires
September 03, 2019 06:20 ET (10:20 GMT)
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