Iron ore price: China’s weekend surprise could stop slump turning into rout

Property sector slump

Iron ore prices fell again on Friday bringing the week’s losses for the commodity to 8.7%, the worst performance since October 2011.

The benchmark import price of 62% iron ore fines at China’s Tianjin port is now trading at $110.40 a tonne, the weakest level since October 4.

The steelmaking ingredient is also down 30% from its 2013 high of $159 hit in February.

Iron ore’s recent sharp pullback is beginning to resemble the declines suffered in the fall of 2011 and again in 2012.

Any acceleration in the sell-off on Monday could turn the slump into a full blown rout  with traders already talking about market panic.

Iron ore hit an all time record in February 2011 of over $190 and famously eight months later suffered a $60 drop over the duration of 28 days.

The market suffered a similar shock in August-September last year when the Chinese import price dropped 25% over a month to a three-and-a-half year low of $86.70.

On both occasions the rally in prices was equally as impressive as the falls – so much so that China characterized the 2012 comeback market manipulation.

Things may be different this time around with market fundamentals considerably weaker.

A slowdown in China which consumes more than 60% of the seaborne trade and overcapacity in that country’s steel industry have been cited as reasons for the panic in markets, but the primary factor driving down prices is vast new supplies coming onto the market.

In a research note this week investment bank Barclays said new capacity will push prices down to “the mid-$90s by 2014 in our base case, with potential to drop to the low $80s in even a modest downside case in which softer demand growth magnifies the effect of the supply increase.”

However there are also factors counting in iron ore’s favour.

Inventory levels at Chinese ports are still down more than 25% from year ago levels of around 100 million tonnes and the country’s steel output continues to run at a near record rate of 2 million tonnes a day.

And China is still able to surprise on the upside.

On Saturday, China PMI figures – the most reliable data point to gauge economic activity in the country  – showed a surprise jump with production and trade rebounding. Expectations were for static growth or contraction.

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