Benchmark iron ore fell 2% on Thursday to its lowest level since September 2012 when the steelmaking raw material spent two weeks below $100 a tonne.
According to data from the The Steel Index, the import price of 62% iron ore fines at China’s Tianjin port was pegged at $100.70 per tonne on Friday, down 2% or $2.10 on the day.
Apart from that quick gap down in 2012 ore hasn’t traded below $100 at all since 2009.
Futures trading on the Dalian exchange saw the price for third quarter deliveries tank 3% to an implied Tianjin price of $98.50.
The main reason for the weakness in iron ore is upheaval in China’s steel industry where demand appears to have fallen off a cliff even as production increases.
China forges as much steel as the rest of the world combined and the globe’s most active steel future – Shanghai rebar – dropped to a record low of Rmb3,130 ($500) per tonne on Friday.
Chinese steelmakers suffer from chronic lack of of profitability and overcapacity with utilization rates falling as low as 70%-75% last year translating into close to 200 million tonnes of excess capacity.
Despite weak end demand and Beijing’s attempts at consolidation and its crackdown on polluting industries, production continues to rise because regional authorities are fearful of closing down plants that provide considerable regional revenue and employment.
Platts reports quotes a Hebei-based steelmaker as saying the rapid fall in the price was unexpected and “the volatility is not helping convince people to start buying again”:
“Mills, especially those in the north of China, are not actively trying to buy seaborne cargoes now,” a Zhejiang-based trader said. “They’d rather go to the ports to purchase cargoes because prices are still cheaper there and there are high volumes for the taking.”
There is definitely volumes for the taking with inventories at Chinese ports surging 25% in 2014 to just under 110 million tonnes, thanks to record setting imports in 2014.
China, responsible for two-thirds of the 1.2 billion tonne seaborne trade, imported 83.39 million tonnes of iron ore in April, the second highest monthly figure on record.
Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong told Reuters after a seasonal uptick in April Chinese demand weakened this month, forcing traders to destock:
“Downstream demand has turned weak and the only way to sell to the market right now is to lower your prices,” said Lau.
A slowdown in the world’s second largest economy – particularly the property sector that accounts for almost half of all steel demand – has seen the steel price down nearly 15% this year while iron ore has lost 25.4% in value in 2014.
Another factor pushing the price lower is Beijing’s crackdown on the country’s vast shadow banking system.
It’s common practice in credit-scarce China for commodity traders and industries to use metals and ore as collateral for short-term financing deals.
Some estimates put the portion of iron ore inventories that is used for trade credit at 40%.
Now that Beijing’s crackdown coupled with a weakening yuan – another deliberate move by authorities – are pushing these deals under water, much of that ore could find its way back onto the market creating a vicious circle.
Apart from moderating demand from China, another factor pushing down the price of iron ore is the prospect of a huge ramp up in global output.
BHP Billiton, Fortescue Metals Group and Rio Tinto are targeting an additional 170 million tonnes in Australia in 2014, while Vale wants to grow from just over 300 million tonnes per year in 2013 to over 400 million tonnes by 2018.