SINGAPORE (Reuters) - Iron ore’s steepest ever price slide on Tuesday reflects slowing growth in top consumer China and casts more doubts on Beijing’s commodity demand at a time when the outlook for developed economies remains shaky.
China’s appetite for iron ore has weakened with slowing steel demand from the construction sector, pushing down prices for the steel-making ingredient nearly 30 percent since early September.
Some mills in China have stopped buying iron ore as they curb steel output to cope with the downturn in demand. China buys around two thirds of seaborne cargoes to feed the world’s largest steel industry, and is the biggest market for the mining giants Vale VALE5.SA, Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)BLT.L.
Weak steel demand across Asia cut profits at Japan’s two biggest steelmakers — Nippon Steel Corp (5401.T) and JFE Holdings Inc (5411.T) — in the fiscal six months to September, and both slashed their full-year outlook.
JFE said steel prices in Asia will remain stagnant because of slower Chinese demand and larger-than-expected supply from South Korea.
Australian producer Fortescue Metals Group (FMG.AX), which sells nearly all of its iron ore to China, said it could take months for prices to recover as Chinese mills work off inventories.
“We are seeing some short-term volatility because the steel mills are destocking in China,” Fortescue Chief Executive Nev Power told a media conference in Sydney on Wednesday.
“It has been a little more hand-to-mouth.”
Iron ore with 62-percent iron content fell 7.2 percent to $128.50 a tonne on Tuesday, according to Platts. It was the biggest percentage drop for the reference price index since Platts began publishing it in November 2008.
Most miners, including Vale and Rio Tinto, use the Platts index, based on spot transactions in China, to fix supply contract rates for clients.
The rapid drop in iron ore prices “implies demand for steel in China is pretty bad and a lot of steel mills have to cut production so the whole economy is bad,” said Henry Liu, regional head of commodity research at Mirae Asset Securities in Hong Kong.
“If iron ore prices drop so much, it doesn’t mean (Chinese mills’) profit margin will improve because steel demand has been dropping,” he said.
The price of hot rolled coil in China fell 8.7 percent to 4,123 yuan ($648) a tonne at the end of last week, while rebar shed more than 6 percent to 4,296 yuan a tonne, according to data compiled by Bank of America-Merrill Lynch.
China’s economic growth has slowed but remains strong. The world’s second-largest economy expanded 9.1 percent in the third quarter, its weakest pace since early 2009 due to weaker export markets and tighter monetary policy.
China has repeatedly raised interest rates and banks’ reserve requirement ratio to sap liquidity and fight price rises. Premier Wen Jiabao reiterated on Tuesday that taming inflation remains the top priority for the Chinese government.
A growing number of Chinese steel mills have shut for maintenance — effectively curbing output to cut losses.
“Steel mills have started to cut production and have suspended iron ore purchases, while miners keep on producing and delivering spot cargoes, so we see iron ore prices diving these days,” said an iron ore buying official with a mid-sized steel mill in south-central China.
“We’re just buying on a hand-to-mouth basis now.”
Just a few months ago, China’s construction sector demand had steel and iron ore markets flying high. China’s monthly crude steel output hit a record 60.25 million tonnes in May as mills raced to keep up with a construction boom aided by the country’s drive to build more cheaper homes.
That helped iron ore prices stay high for most of the year, after rising to a record $193 a tonne in mid-February. But the momentum lost steam in September when steel prices fell at the start of what is usually a peak consumption season in China.
China’s crude steel output fell 3.5 percent from August to 56.7 million tonnes in September, the lowest in seven months.
“Everyone is desperate to lower their production costs right now. Demand for steel is very weak — if you look at investment in high speed rail, for example, there has been a fall of 50 percent,” said Xu Zhongbu, chief executive of Beijing Metal Consulting, which works for some leading Chinese steel mills.
Rio Tinto on Tuesday blamed the steep fall in iron ore prices to a strategy by bigger rival Vale to divert shipments destined for Europe to China.
The big drop in spot prices forced miners to forego the more costly quarterly contracts for Chinese clients, giving them the option to buy at prices closer to spot.
Vale, which had been selling most of its cargoes via long-term contracts, said last week it was open to different pricing options.
Iron ore is China’s biggest commodity import in terms of volume, with 2010 purchases reaching nearly 619 million tonnes. In January to September, imports totaled more than 508 million tonnes, up 11 percent from the same period last year.
Chinese demand for other industrial raw materials has also shown signs of some slowdown.
Copper lost more than 25 percent of its value in the third quarter as top buyer China slows purchases due to weakness in the United States and Europe, its two biggest export markets.
($1 = 6.360 Chinese yuan)
Additional reporting by Ruby Lian in SHANGHAI, David Stanway in BEIJING, Jim Regan in SYDNEY and Yuko Inoue in TOKYO; Editing by Simon Webb