After surging by close to 10% in the second half of last week, Chinese iron ore futures dropped on Tuesday for the first time in four sessions at the back of the concerns emanating after a fire that broke at a government-owned steel mill. Particularly, concerns relating to planned safety inspections that need to be stricter have been pointed out and this has curbed demand for iron ore, as lines are shut for the review. As a result, the most-active iron ore futures on the Dalian Commodity Exchange slipped 1% to 576.5 yuan ($88.18) a tonne on Tuesday. Further, Iron ore inventories at China's ports dropped to 133.35 million tonnes by last Friday from 133.45 million tonnes in previous week, the lowest since the week of May 12. Bengang Steel Plates Co on Friday has closed more than one-third of the steel-making capacity at its plant in the city of Benxi in China’s north-eastern province of Liaoning. The fire has led to the shutting down of about 10,000 tonnes a day of pig iron output. Investors are concerned that the fire will result in more stringent safety inspections for the steel industry as it occurred right after the State Council, China's cabinet, ordered nationwide safety check across 20 major industry sectors. In turn, mills may slow down their pace of churning out steel products to deal with safety inspections, which will limit the demand for iron ore.
Heavy pollution has become a concern and the potential impact of environmental and safety checks is overshadowing several industries in the world’s second-biggest economy. Last week, China’s State Administration of Work Safety announced that it will carry out nationwide safety inspections in various industries, including coal, chemical, transportation and construction. Meanwhile, to meet politically crucial 2017 air quality targets, the Ministry of Environmental Protection (MEP) will launch a new round of inspections starting from September till the end of March.Steel production in smog-prone Beijing-Tianjin-Hebei region will be limited during winter and mills in some cities, and top steel producer Tangshan has already been ordered to cut capacity by as much as 50% in polluted days. The latest incident might ignite the risk of even larger capacity cuts across China’s steel sector in the near-term. This will in turn weaken the demand for iron ore and coking coal from mills.
From a macro standpoint, Dalian Commodity Exchange (DCE) iron ore futures, considered to be the main reference point for Chinese domestic investors, has seen low volatility despite trading in a wide range of more than 200 yuan ($30.53) a tonne this year. On the other hand, Shanghai benchmark steel rebar futures have followed an upward trend, rising to 3,993-yuan tonne at the close on September 1, up 57% from the 2,545-yuan reported at the end of 2016. While they haven’t moved up in a straight line, steel futures haven’t exhibited the volatility trend of iron ore.
On the other hand, August 2017 was reported to have witnessed strong Chinese imports of iron ore with imports of seaborne iron ore of the order of 88.9 million tonnes (July’s imports stood at 85.4 million tonnes and March’s figure was 86.5 million tonnes), as per the vessel-tracking and port data released by Thomson Reuters Supply Chain and Commodity Forecasts. Though steady, but the import data does not suggest for a stellar growth going forward.
Overall, iron ore prices seem to be largely dictated by various economic factors and sentiments across the market. It thus becomes prudent to keep watching out for the iron ore exposures with regards to investment in the miners as there may be value in only selective stocks. Despite the latest developments, ASX mining stocks like BHP Billiton and Rio Tinto have moved up 6.8% and 3.7%, respectively, in last one month (as at September 04, 2017) and are trading at high levels.
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