Fears of steel output cuts pull-down DCE iron ore futures

Intensifying market speculation that Chinese steelmakers will have to trim crude steel output this half to comply with the central government's directive has triggered a drastic correction in the country's iron ore futures markets.

On Thursday, the most-traded iron ore futures contract on the Dalian Commodity Exchange (DCE) for September delivery slumped for the second day to finally close the daytime trading session at Yuan 1,138/dmt ($175.9/dmt), a one-month low and down by a significant Yuan 64/dmt or 5.3% from Wednesday's settlement price. The contract even dipped to as low as Yuan 1,114.5/dmt in afternoon trading.

On Wednesday, the contract had already dropped by 3.9% from Tuesday's settlement price, according to DCE's data.

"More provinces have confirmed that they are requesting their local steel mills to reduce steel production for the remainder of the year, and some steelmakers' production has already showed some reduction," a Shanghai-based analyst with a futures company commented. "So market concerns about weakening iron ore demand in the longer-term have quickly mounted," he added.

China's central government had earlier mandated that crude steel output this year must fall below the 2020 result, as Mysteel Global has reported.

Mysteel's latest data released on Thursday showed that production of the five major steel products comprising rebar, wire rod, hot-rolled coil, cold-rolled coil and medium plate among the 184 mills surveyed nationwide reversed down over July 15-21 after the short-lived rise during the prior week, falling by 3.3% on week to a four-month low of 10.3 million tonnes.

Meanwhile, in the iron ore spot market, steelmakers are walking away from the previously high ore prices, prompting some iron ore traders to be more willing to sacrifice their margins to sell their stocks at hand, Mysteel Global observed.

"In fact, I have heard that a few steel mills have sold some long-term contract stocks at hand in the seaborne market, as their steel production plans may have to undergo some changes in coming months," a Shanghai-based iron ore trader said.

Nevertheless, in contrast, the most-traded rebar contract on the Shanghai Futures Exchange for October delivery closed the daytime trading session on Thursday higher at Yuan 5,648/tonne, up by 1.1% from the settlement price on July 21.

Written by Victoria Zou, zyongjia@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.