Will Iron Ore Collapse Cause Chinese Domestic/Export Steel Prices to Drop?

Iron ore prices continue to boil and bubble, with the key word being bubble. At the beginning of April, 62% Fe fines were trading at $117 per dry metric ton (dmt). They peaked nine days later at $119.4/dmt and since then the air has been leaking out of the bubble. On Wednesday, iron ore prices reached their low for the month as the pace of the decline has been increasing over the past week due to the Chinese banks once again (link to previous SMU article) refusing to loan money to steel mills as they are unable to repay existing loans. At the same time the government has been cracking down on loans using iron ore as collateral. The net result has been an increase in inventories – iron ore at Chinese ports now stand at record levels exceeding 110 million metric tons and, according to SMU sources, growing.

According to Forexlive, “China Banking Regulatory Commission has started a crackdown, likely to result in a higher deposit margin requirement for banks to supply letters of credit for iron ore import. It would impact on iron ore importers, forcing them to dump their iron ore holdings in the market to meet liquidity demand.  It would also impact upon Chinese steelmakers, who would see input costs rising due to having to pay more as deposit margin.”