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Shanghai rebar meltdown: The last time Chinese steel cost this much iron ore was trading at $70

Iron ore prices fell again on Wednesday as the outlook for steel demand in China  – responsible for consuming 60% of the world’s iron –  continues to darken.

The benchmark import price of 62% iron ore fines at China’s Tianjin port dropped 3.5%  to $118.60 a tonne, down 12% since the start of July and more than 32% weaker than this time last year. Tianjin ore averaged a record $168 during 2011.

Chinese import prices are now the lowest since October 2011 according to data provided by Steelindex. During that month ore  shed over $60 a tonne from record highs above $180 a tonne to briefly touch $116 a tonne. Iron ore first traded above $120 a tonne in January 2010.

Reuters reports small Chinese traders are being forced to sell off loss-making stockpiles “as they give up hope for a market rebound anytime soon”:

“The capitulation by small traders is important because China’s iron ore market is fragmented and thousands of small scale dealers play a significant role in price setting.

“They reflect spot market sentiment more accurately than big state owned firms, which have more diversified businesses and are normally locked into long-term contracts.”

The Financial Times (sub required) quotes a research note from Nomura steel analysts Matthew Cross:

Chinese rebar prices are now 8% lower than October 2011 lows, while iron ore prices remain 5% higher. […]

Iron ore prices have already reached US$120/t “floor prices” but the destock may have just begun. Iron ore prices fell roughly 35% during both previous destocks, from US$180/t to around US$120/t, a similar decline from 2012 iron ore price highs of US$150/t suggests potential downside to around US$100/t

Cross has a chart that points out that the last time Chinese rebar was priced at this level iron ore was trading at around $70 a tonne.

Chinese mills have been producing at record pace of 2 million tonnes per day since April despite a steep drop-off in demand as the country’s building boom begins to look more and more unsustainable.

The Chinese economy – the second largest in the world – grew 7.6% in the first half of this year. That was the slowest pace since early 2009 at the peak of the global financial crisis.


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