Chinese iron ore futures fell Monday, as the country's
zero-Covid strategy threatened to derail a recovery in industrial activity
after fresh infections surfaced.
The most actively traded September iron ore contract on the Dalian Commodity Exchange declined by 10% in early trading to 754.5 yuan ($112.33) a metric ton, its biggest one-day drop since August.
Chinese authorities said last week that Shanghai residents will need to be tested every week while temporary lockdowns will be placed on residential complexes where Covid-19 cases are found, raising concerns that industrial activity will "remain impacted for the foreseeable future," ANZ analysts said in a note.
Although lockdowns are now easing, construction activity is slow to resume and manufacturing companies are hesitating to reopen due to the fear of new Covid-19 infections, Fitch Ratings analysts said in a note. "While the government is committed to stimulus and monetary policy easing, there has not yet been a recovery in steel demand," they said.
Weak demand for steel is forcing mills to extend maintenance periods in areas such as the country's steelmaking hub of Tangshan, the ANZ analysts said. Inventories of finished steel products are also rising, they said.However, there are supply-side issues that could limit price declines of iron ore. The Fitch analysts said that disruptions arising from the Russia-Ukraine war and seasonally lower Brazilian and Australian exports are supporting prices, and that they expect prices to gain if steel consumption revives in the second half of the year.