Iron ore slump hits Rio Tinto PLC as pessimism over Chinese demand rises

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Iron ore prices climbed 2.7% to US$113.95 a tonne on Tuesday after falling sharply 23% in the previous eight sessions.

A steep eight-day tumble had sent the metal’s value plummeting by nearly a quarter to US$112.35 a tonne on Monday, as steel mills shut blast furnaces amid growing concerns over China’s demand outlook. .

Monday’s plunge was triggered by fears of a collapse in steel consumption in China, the world’s biggest user.

The most traded iron ore contract on China’s Dalian Stock Exchange fell 10.8% to 747.50 yuan ($111.74) a tonne, its lowest level since March 16.

The first month of July contract on the Singapore Stock Exchange fell 7.7% to US$110.75 a tonne.

Recent outbreaks of COVID-19 in China, a slowdown in construction activity during the rainy season, rising steel inventories caused by sluggish demand and falling factory profits have led traders to s worry about market fundamentals.

At the start of 2021, iron ore was selling for around US$110 a tonne and the price rose in March to US$156 a tonne as China’s lockdown gathered pace and steel mills and traders responded to pledges repeated attempts by the government to stimulate the economy. and achieved China’s 5.5% GDP growth target for calendar year 2022.

Monday’s eight-day slump suggests traders and mills are losing confidence that a surge in Chinese growth will materialize in the second half.

“The decision to operate at high capacity even after shutdowns hit growth suggests companies are also betting a rebound in infrastructure and real estate will support demand,” the Gavekal analyst said in a note, reports Bloomberg.

“Although infrastructure spending has recovered this year, the real estate sector, which accounts for 39% of total steel consumption, has not fully recovered and the outlook is uncertain.”

This month, an index of Chinese steel profits fell nearly 90%, with reports indicating that steel companies are now idling their blast furnaces and advancing planned maintenance in a bid to limit their losses, which further lower the price of iron ore.

“The more you produce, the more you lose,” an international trader told Platts of the plight of steel mills.

Iron ore producers are seeing their stock prices affected by what is happening in the Chinese steel industry.

Rio Tinto PLC (LSE:RIO) has fallen 14% since June 7 and Vale International Group (LSE:VALE) SA has fallen 17%, while BHP Group Limited (LSE:BHP) and Fortescue Metals Group (ASX: FMG) also dropped significantly.

Without a quick turnaround in China, these companies may soon have to cut their exports.

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