Iron ore is falling - what lies ahead

Key supply and demand stimuli for iron ore appear to be weakening, seeking to balance amid fears of rising steel supplies. In addition, Chinese stock market regulators have announced major steps to discourage speculative trading in steel products.

Steel and iron ore prices fell late last week, with iron ore ending the day 5.2% lower at $ 55.68 a tonne, after hitting a 16-month high of $ 68.70 a tonne. This stimulates the extraction of ore and the use of mining equipment such as loading machines, conveyor belt and others.

Steel rebar and hot rolled coils were down 4.6% and 4%, respectively. Iron ore futures on the Dalian and Shanghai exchanges were down 13% over the week, while hot rolled steel fell 12%, bringing losses since April 21 to about 25%.

In mid-April, the price of iron ore hit a 16-month high of $ 68.70 after rising substantially over two trading days amid frenzied futures trading on the Dalian Commodities Exchange. However, on Monday, news reports from China canceled expectations for a robust stimulus package. On Tuesday, the most active contracts settled down 4.7% at $ 59.10 a tonne.

These two products have been actively traded since the beginning of the year. Chinese steel mills are boosting their productivity in anticipation of the Chinese government stimulating the economy, including housing and infrastructure, which will require more steel.

"A report from Beijing earlier this week suggests further easing, which has sparked a panic in the sale of steel-related commodities," said Wang Ying, an analyst at CCB Futures. The low steel prices caused by the oversaturation of the market will make it tough, but for the Chinese steelmakers it can remain profitable. Subsequent lower demand for iron ore will push prices lower, the report said.