Benchmark iron ore fell more than 2% on Monday to fresh lows last seen September 7, 2012.
According to data from the The Steel Index, the import price of 62% iron ore fines at China’s Tianjin port was pegged at $89.00 per tonne, down $1.90 on the day and the first time below $90 in 22 months.
Iron ore is down 33.7% year to date and first declined to double digits mid-May and attempts at a comeback this time have fallen short.
Apart from that quick gap down in 2012 when the steelmaking raw material spent two weeks below $100 a tonne ore hasn’t traded in double digits at all since 2009.
On a quarterly basis iron ore hasn’t averaged less than $100 since the height of the global financial crisis, but is now in danger of doing so – the quarterly average now stands at $104.60.
China is responsible for two-thirds of the 1.2 billion tonne seaborne trade and the declines in the price of the steelmaking raw material has been blamed on continued signs of a slowdown in the world’s second largest economy.
The world’s most active steel futures contract – Shanghai rebar – touched a low of 3,009 yuan ($483) a tonne on Monday, the lowest since the exchange launched the contract in March 2009 after data showed real estate investment slowed sharply and property sales and new housing starts remained subdued.
The the property sector that accounts for almost half of all steel demand in the Chinese economy.
Another complicating factor in the iron ore market is Beijing’s clampdown on unofficial financing activities happening outside state-owned banks, the so-called shadow banking system. The use of commodities – particularly copper and iron – as collateral in trade financing agreements makes up a large portion of the unofficial banking sector.
Estimates vary wildly but the portion of iron ore and copper stockpiles at the country’s ports tied up in these deals could be as high as 60%.
Last week’s revelation that authorities are probing whether traders at the port of Qingdao pledged the same copper, iron ore and aluminum inventories as collateral for loans multiple times to different banks could mean and end to practice altogether.
After a strong first quarter iron ore imports fell back to 77.4 million tonnes in May, down 7.2% from April; a sign that these deals may be unwinding at a more rapid rate than previously thought.
With soft underlying demand, record high stockpiles of more than 100 million tonnes and ample supply of seaborne ore already hurting prices, the dumping of finance-related inventories onto the market is destined to bring further weakness.
Morgan Stanley last week cuts its iron ore price estimate for this year and the investment bank foresees a further drop in 2015. Morgan Stanley forecasts iron ore to average $105 tonne for the whole of 2014 versus a year to date average of $113 a tonne. Back in May, the bank still pegged $118 for this year.
For 2015, when an increase in seaborne supply will more than make up for domestic Chinese production cuts the bank sees iron ore averaging $90 a tonne, a more than one-fifth cut to earlier estimates.
Image of construction workers in Beijing by Loic.Hofstedt