China: Government intervention, seasonal slowdown drag down iron ore, steel futures

Iron ore futures on the Dalian Commodity Exchange (DCE) plunged by over 6.8% yesterday. In fact, benchmark iron ore and steel futures across Asia also fell. The most-traded September iron ore futures on the DCE dropped to 1,121 yuan ($173.2) / t, their weakest since 10 Jun, while the most-active July contracts on the Singapore Exchange slid to $197.7/t, the lowest since 09 Jun, as per reports.

Shanghai Futures Exchange (SHFE) In tandem with DCE, at SHFE also steel futures fell by 3.3%, HRC futures Oct contracts closed at RMB 5,170/t ($800/t), lower by RMB 177/t ($27/t) against closing levels on Friday, 18 Jun and rebar Oct contracts closed at RMB 4,889/t, lower by RMB 172/t against last Friday's closing.

Why did futures drop?

Chinese government has stepped up investigations into the iron ore spot market and has been cracking down on rising prices of commodities to prevent speculative trading in a bid to remove hurdles in the way of its post-pandemic economic recovery.

Another key influencing factor is the seasonal slowdown in construction steel demand that has dragged down sentiments and futures. China has entered the monsoon season when, due to the hot and rainy weather, construction activities get scaled down considerably leading to dull domestic demand. This, in a cascading effect, results in rising inventories at mills that drag down the prices.

Rebar demand down

Slowdown in construction activities impacts the production at mills and they are expected to reduce their iron ore purchases. Chinese steel rebar benchmarks are therefore also expected to reduce as rebars are a key item required in construction. In fact, weaker rebar prices have likely contributed to thinning margins of mills, further putting a dampener on iron ore demand and prices, it is learnt.

Notwithstanding the above, spot prices of seaborne and port-side iron ore in China have held firm at above $200/t since May-end, despite government efforts to rein in commodity inflation.

Pressure on Indian mills?

Chinese domestic billet prices settled at RMB 4,900/t ($757/t), ex-Tangshan, including 13% VAT yesterday, down by RMB 160/t ($25/t) on a w-o-w basis. With the SHFE rebar futures contract dropping sharply, China may not be interested in importing billets above $635/t, CFR, said a trader. This is likely to create some pressure on Indian mills which are actively looking to liquidate inventories via exports, considering the subdued domestic demand.

"China's overall demand lull in the rainy season could weigh on Indian mills," said another source.

Prices as on 8:55 IST, 22st June. d-o-d changes indicated against closing price of 21st June