Red earth awash in red ink as iron ore hits 6-month low

Company News

by Peter Milios

The price of iron ore has decreased to its lowest point since the first week of December, as concerns regarding an oversupply of the commodity in China create stress within the market.

On Monday, the Iron Ore 62% fe price closed at $US130.93 per tonne. This represents a near 40% loss year on year, eliminating all the gains made this year.

Analysts are warning that the price could fall to as low as $100 a tonne, according to the Neil Hume of the Financial Times.

However, this time last year, the price of iron ore was going in the complete opposite direction, reaching a record high of above $US230 per tonne, following the global recovery from the COVID-19 pandemic.

Then, further gains were made this year following fears to the disruption of supply after Russia invaded Ukraine, who are the 8th and the 4th largest global exporter of iron ore, respectively, according to figures revealed in oec.world.

Now, extreme COVID restrictions in China, aligning with their zero covid policy, has slowed down their property sector, damaging the demand for steel’s main ingredient.

As a result, Chinese steel mills have been cutting production. So far, the mills have “maintained their outputs at an annualised rate of more than a billion tonnes of steel until last month” Stephen Bartholomeusz, from the Sydney Morning Herald writes, anticipating that the central bank would boost the economy with a huge surge in infrastructure and construction spending that would support demand.

But this hasn’t happened.

Instead, there are now excess stockpiles of steel and with some mills suffering “largely negative margins” Richard Lu, steel research analyst at CRU Group mentions.

And this excess supply of steel might only worsen.

“Markets are particularly worried that demand growth expectations linked to China’s pledge to boost infrastructure investment may not materialise, especially with China’s zero-Covid policy still in play,” says Vivek Dhar, Commonwealth Bank of Australia analyst.

It is also worth noting that recent heavy rains within China have also led to construction woes and a piling up of steel, further damaging profit margins.

The fall in the price of steel poses concerning signs for the Australian economy.

Australia’s iron ore has risen from $103bn in 2019-2020 to $149bn in 2020-2021, making it, by far, the nation’s largest export. Most of it is shipped to China, who consume a whopping 61% of the world’s iron ore.

As a result, Australia’s iron ore giants took a massive hit.

BHP (ASX: BHP) reached a 6-month low on Friday, dropping by roughly 16% over the previous month. Rio Tinto (ASX: RIO) has declined by 6% over the past month, whilst Fortescue Metals Group (ASX:FMG) decreased by almost 7% over the same period.

Interestingly, last week JPMorgan said that the latest weekly data suggests that the property market is the strongest it has been in 2022, believing that demand is surging from cities free from COVID lockdowns.

“A sustained improvement in China property activity, coupled with accelerating infrastructure investment, could provide a boost to . . . steel and demand and iron ore prices in the second half of 2022,” JPMorgan stated.

In response to the increase in the price of iron ore, Chinese President Xi Jinping has pledged that China will increase measures to combat their current economy and achieve economic and social goals, whilst minimising the effects of COVID-19.

Peter Milios

Peter Milios is a recent graduate from the University of Technology - majoring in Finance and Accounting. Peter is currently working under equity research analyst Di Brookman for Corporate Connect Research.

Are you a 708 sophisticated investor?

A sophisticated investor is defined under Section 708 of the Corporations Act (net assets of $2.5 million or annual incomes in excess of $250,000).

They are eligible to receive information regarding wholesale investment opportunities that are not available to regular or retail investors.

Please subscribe if you would like to be alerted to these types of opportunities.