Iron ore consolidates as Chinese steel production drops again

Iron ore prices continued to trade in triple digits on Wednesday, adding $0.50 to $104.20 a tonne, as it appears to enter a consolidation phase after a strong rally in September.

Benchmark 62% iron ore fines at China's Tianjin have now clawed back more than 20% of its value since hitting a three-and-a-half year low of $86.70 on September 5. This time last year the commodity was trading at $172 a tonne.

The modest gains for the key steelmaking ingredient comes despite news from the China Iron & Steel Association (CISA) that the country's average daily steel output dropped 2.01% to 1.857 million tonnes between September 11-20 from 1.895 million tonnes over the previous 10 days.

While the pace has slowed from the record-breaking rate of around 2 million tonnes per day since April, the industry is still plagued by overproduction. Profits for the country's 70 largest mills, that together account for 80% of total Chinese steel production, fell more than 95% year-on-year over the first six months of 2012.

China accounts for roughly 60% of world consumption of iron ore and comes close to producing more steel than the rest of the world combined.

Iron ore's recovery comes after the Chinese government approved a raft of new building and rail projects worth 1 trillion yuan ($157 billion) early September in a concerted effort to boost its slowing economy.

Investors on the Shanghai stock market do not seem convinced that the stimulus is working. The Shanghai Composite Index touched its lowest point in more than three-and-half years on Wednesday. CNBC quotes Philip Chan, director at Shenyin Wanguo Securities:

While western watchers are looking for more stimulus, the people closer to the market are looking at the quality of the stimulus.”