Iron ore traders are likely to closely monitor the G20 summit in the Chinese city of Hangzhou next month, but not to hear the economic prognostications of world leaders.
Instead they will be studying the impact on the market for iron ore, a key ingredient in steel, of reported government orders to shut down polluting steel factories in surrounding areas and provinces, as Beijing tries to ensure clear skies ahead of the event on September 4-5.
The price of iron ore, a big source of profits for global mining houses such as BHP Billiton and Rio Tinto, has rallied about 40 per cent this year, making it one of the best performing commodities. But analysts are now warning that a weakening in steel demand in the second half of this year could halt its advance.
The G20 summit could see steel output reduced by 3.3m tonnes, analysts at Morgan Stanley estimated. While a small amount of China’s total, it could still undermine prices and prompt large moves on the country’s heavily traded futures market.
“Given that China’s construction activity eases over September to October, this event may act as a catalyst for a sell-off,” they said.
China’s credit surge this year has triggered a speculative trading frenzy in iron ore and steel futures, which have made it harder for the government to cut excess steel capacity.
The country produces about half of the world’s steel but aims to reduce capacity by 45m tonnes by the end of the year as it hopes to be accorded “market economy” status by the EU, whose member countries have accused it of overproducing cheap steel.
Last week Lian Weiliang, deputy head of the National Development and Reform Commission, stepped up pressure on local governments to cut steel capacity saying that “those who do not meet their obliged targets will be held accountable”.
The most-traded iron ore contract on the Dalian Commodity Exchange has risen almost 40 per cent to 442 yuan a tonne this year, while steel rebar futures on the Shanghai Futures Exchange have jumped 45 per cent.
But Chinese investors may now be starting to get more negative on their outlook for iron ore prices for the first quarter of 2017, according to Citigroup.
“Chinese futures traders have reportedly been raising concerns over the sustainability of the recent iron ore rally due to worsening demand and a robust supply pipeline,” they said.
Steel demand should fall further in the fourth quarter as the economy weakens, according to analysts. In addition, supply from the biggest producers shows little sign of slowing down.
The price for delivery of iron ore to China traded at $61.50 a tonne on Wednesday. Citi predicted it could fall to $50 by the end of the year and to an average of $45 a tonne in 2017.
SOurce:ft