Iron ore enters freefall amid global commodity sell off

Commodity markets suffered a violent sell-off as mounting anxiety about slower economic growth sent oil and metal prices tumbling and iron ore plunged on weaker steel demand. The Australian currency fell to a 10-month low.

The iron ore price plunged nearly 15 per cent to $US130.2 a tonne and is down 45 per cent from the record high of $US237.57 it reached just three months ago. This continues to weigh on the Australian dollar, which fell 1.2 per cent to US71.5¢ as the risk of the currency falling below US70¢ grew.

Strategists had tipped iron ore’s valuation to ease from elevated levels due to China’s environmental steel production curbs, but the intensity of this pullback – which Morgan Stanley economists said was the commodity’s fastest price correction on record – has pundits rattled.

“We did suspect there was quite a bit of speculation built into the iron ore price when it was above $US200, but the sharp speed of this correction has taken a lot by surprise. When these things burst, they move pretty quickly,” said ANZ senior commodity strategist Daniel Hynes.

“This move goes against the Chinese data we’ve seen so far. While soft, it doesn’t warrant this reaction in prices. This is more about what could potentially happen in the second half, with ongoing restrictions on the steel industry and weaker economic growth.”

The world’s second largest economy is aiming to cut steel output growth this year to 2020 levels. After expanding around 12 per cent in the first half of this year, the country must now reduce steel output by 12.2 per cent from August to December to reach its goal.

An observed slowdown in consumer demand for steel, which is exemplified by a 5 per cent correction in China’s rebar price since the start of August, is also playing a significant role. Rebar is reinforcing steel typically used in construction concrete.

“China’s industrial production data for July … highlights a meaningful slowdown in Chinese steel’s key end-use sectors, notably in the property and infrastructure sectors,” Morgan Stanley economist said.

“Our China economist believes that the current downtrend could result in additional counter-cyclical easing, but we believe that it could take six months before it translates into actual steel demand.”

The local economic repercussions are growing in severity, because iron ore prices are now on track to fall below the levels assumed by the federal budget, according to Commonwealth Bank. The budget assumes that prices will fall to $US55 a tonne by the end of March next year.

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