Iron ore tumbles back toward $60s as bears sharpen their claws

In Singapore, the most-active SGX AsiaClear contract lost as much as 4.4% to $71.24 a metric ton, the biggest drop since December, and traded at $71.94 by 5:13 pm. On the Dalian Commodity Exchange, futures tumbled 3.5% to the lowest close in more than three weeks.

Iron ore’s coming under renewed pressure after surging into a bull market last month, eroding earnings at miners including Rio Tinto, BHP Billiton and Vale SA.

This winter, China ordered curbs on some steel output to fight pollution, a move that initially buoyed demand for higher-grade ore as mills’ profitability climbed. In recent days, Barclays and ING bank have both warned that iron ore’s set to drop when profitability levels recede.

“Steel profitability has deteriorated recently and producers are starting to replace high-quality ore with low grades, which are more cost-efficient,” Zhao Chaoyue, an analyst at China Merchants Futures, said in a text message on Tuesday.

“The restocking cycle - where mills build up their raw materials inventory in preparation for output restarts - has also come to an end.”

The shift in preferences may be seen in the difference between benchmark 62% iron content material and lower grades. While benchmark ore delivered to Qingdao fell to $76.61 a dry ton on Monday, extending a 1.7% loss last week, the 58% product rose to $42.92 after a 1% gain last week.

In New York trading on Tuesday, shares in Brazilian iron-ore giant Vale sank 4.8% at 10.57 am, the steepest intraday drop since May, while US producer Cleveland-Cliffs was down 2.6%.

Benchmark iron prices will decline to average $50 between April and June, according to Barclays’s Dane Davis, while ING has said they’ll sink below $70 this quarter and are seen at $55 in the second to fourth quarters. China Merchants’s Zhao said: “Iron ore’s going through a period of correction.”

Iron ore’s fall comes against a backdrop of plentiful supplies, with miners adding cargoes and record holdings at China’s ports. Stockpiles stand at 154.4 million tons, enough to cover more than 50 days’ of imports, according to Bloomberg calculations based on Shanghai Steelhome E-Commerce data.

One of the drivers of the decline in mill profitability in China has been weaker steel product prices. Spot reinforcement bar, a product used in construction, has slumped into a bear market after peaking in early December at the highest level since 2008, according to Antaike Information Development.

On steel markets on Tuesday, rebar for May delivery fell 0.45% to close at 3 912 yuan a ton on Shanghai Futures Exchange, the first drop in a week. Hot-rolled coil futures rose 0.1% to 3 903 yuan a ton.