Weakening China steel margins put iron ore under pressure

Benchmark iron ore futures pulled back on Tuesday after hitting four-week highs in the previous session, as weakening steel margins in top steel producer China weighed on raw material prices.

Iron ore on China’s Dalian Commodity Exchange ended daytime trading 1.4% lower at 1,046 yuan ($161.26) a tonne, while the front-month contract on the Singapore Exchange dropped 2.2% to $166.50 a tonne by 0702 GMT.

“Steel margins have been falling quickly in recent days. This would motivate some high-cost steelmakers to conduct maintenance and consequently reduce iron ore consumption,” said Richard Lu, a senior analyst at CRU consultancy in Beijing.

However, restocking demand ahead of the Lunar New Year holidays is likely to provide some support to prices, along with heavy port congestions in China that have slowed unloading activity, he said.

These “near-term upside risks” helped prop up spot iron ore prices in China, which hit $174.50 a tonne on Monday, close to the nine-year high hit last month, according to SteelHome consultancy.

Miner Rio Tinto reported a 2.4% rise in fourth-quarter iron ore shipments, helped by industrial activity in China, where it said demand remains robust despite fresh COVID-19-induced lockdowns locally.

The sell-off in steelmaking inputs pulled down coking coal by 3.9% and coke by 4%, with restrictions in coronavirus-hit areas in China hampering shipments and adding downward pressure.

Falling prices of construction steel rebar are squeezing margins, said Howie Lee, economist at OCBC Bank in Singapore.

“The recent rise in coronavirus cases in Asia is not helping risk sentiment and commodities are feeling the cold at present,” he said. “But we see this as a near-term dislocation and expect prices of commodities to continue rallying through 2021.”

Rebar on the Shanghai Futures Exchange fell 1.9%, while hot-rolled coil slumped 2.4%. Stainless steel outperformed with a gain of 0.9%.
Source: Reuters (Reporting by Enrico Dela Cruz; Editing by Subhranshu Sahu)