CRU: Iron Ore Falls Below $100/dmt as Supply Improves

With China on holiday, there has been little activity in physical markets, both for steel and iron ore. Attention has shifted to China’s property market where one of the country’s largest developers, Evergrande, is running a high risk of defaulting on its debt. The company has been labelled “the world’s most indebted property developer” and now fails to meet all of China’s “Three Red Lines” – three debt requirements established last year on property developers that they must meet in order to be considered financially stable. There is a risk that a collapse of Evergrande has knock-on effects through the real estate market, either by harming other developers or damaging confidence. However, although the government will stand by its policy of imposing discipline on the sector and so will let investors feel some pain, it is not in their interests to allow a collapse in the sector that threatens economic growth.

As demand for iron ore has continued to weaken, supply has improved in the past week and global exports have come in at the highest level since the first week of January. Seaborne supply is much higher than in the past few weeks and is also much higher than at the same time last year. The coking coal price in China and on the seaborne market continues to rise and we see continued pressure on both low-grade iron ore and lump, both reaching the lowest level in years. Some low-grade producers in the market are already losing money on their shipments due to the falling prices in combination with the rising freight rates. Our sources have also indicated that several traders in China have gone out of business after having been caught on the wrong side of the market during this steady price fall.

Although the sentiment in the market is currently overwhelmingly bearish, we do expect some iron ore restocking by steelmakers towards end-September as China heads into its National Holiday in October. Steel margins are still at a comfortable level in China, although there are concerns over future steel demand, especially if the Evergrande situation escalates.

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