Iron ore tumbles to three-month low as China rate cuts fail to ease growth concerns

Iron ore prices tumbled more than 5% on Tuesday to a fresh three month low of US$120 a tonne, giving back all the gains that led into the Lunar New Year break.

The selloff came even after China's lenders unexpectedly cut the country's benchmark five-year loan prime rate for the first time since June. The five-year loan rate – used for mortgages – was cut by 25 bps to 3.95%, above market expectations of a 15 bp cut to 4.05%.

Iron ore prices have managed to stabilise on Wednesday, up around 1.4% at the time of writing to US$122.5 a tonne from session lows of US$119 a tonne.

Singapore iron ore futures performance over the last five days (Source: TradingView)

Chinese property developers surged in Hong Kong trading following remarks by the housing minister, who announced that 214 cities have implemented a coordinated mechanism for real estate financing. These developers have already submitted over 5,300 real estate projects to banks seeking funding support.

Despite the intraday turnaround, iron ore remains one of the worst performing commodities year-to-date, down around -13%. compared with other commodities like oil (+7.1%), copper (-0.6%), and gold (-1.6%).

Singapore iron ore futures 12-month chart (Source: TradingView)

Concerns are brewing

Mysteel data showed a rise in iron ore inventories at Chinese ports over the week-long Lunar New Year break (10-17 February) but steel mill profitability dropped to the lowest level since mid-November 2023.

Steel mills, particularly in China, are sensitive to changes in input costs, including the price of iron ore. When profitability is low, steel mills may cut back on production or reduce their purchase of iron ore to save costs. This reduction in demand for iron ore can put downward pressure on its price.

Mysteel reported the following commentary from a market analyst based in Shanghai:

"As this is only the first week after the holiday, steelmakers are generally holding a wait-and-see stance regarding procuring iron ore and are hesitating to commit to taking large quantities ... They will likely start replenishing iron ore next week, but they may only buy the tonnage for their immediate production needs."

Iron ore's resurgence from August 2023 lows of US$100 a tonne to peaks of US$140 in early January have largely been underpinned by hopes that rate cuts and other property market support measures will revive a real estate sector that accounts for approximately 35% of Chinese steel demand. However, China's property contraction deepened in December, with the value of new home sales among the 100 biggest real estate companies down 34.6% year-on-year, according to Bloomberg.

Steel demand to contract in 2024

China state researchers in late December said domestic steel demand fell 3.3% in 2023 and contract a further 1.7% in 2024, Reuters reported.

Officials at the China Metallurgical Industry Planning and Research Institute said the country will consume 890 million metric tonnes of steel in 2023, leaving it with a significant surplus.

Steel demand is set to contract in 2024 to 875 million tonnes, driven by a significant drop in construction activity.