Iron ore set for $100 test after slump on China demand fears

Iron ore extended a slide as China’s economic prospects weighed on the steelmaking ingredient, with futures nearing $100-a-ton levels that could begin to squeeze out higher-cost producers.

The commodity plunged more than 5% in Singapore on Wednesday, extending a rout that’s seen it slump from more than $140 a ton early this year on fears over China’s demand prospects. Steel consumption hasn’t ramped up as some investors had expected in March.

Without major new stimulus measures from Beijing, a key focus of attention for iron ore is cost support. While major global miners like BHP Group Ltd. and Rio Tinto Group enjoy very low costs, some more marginal output — in China or India for example — will feel the pinch if prices fall further.


“Cost support will be an important consideration,” Vivek Dhar, an analyst at Commonwealth Bank of Australia, said in a note. “Iron ore will struggle to stay meaningfully below $100 a ton if China’s steel demand tracks sideways this year.”

Iron ore fell as much as 5.3% to $103.45 a ton — the lowest since mid-August — and was at $104.30 at 3:05 p.m. in Singapore. Futures in Dalian dropped 3%, and steel contracts in Shanghai were also lower.

Across commodity markets, prices typically meet downside resistance at levels where higher-cost producers are no longer profitable. That may force them to reduce or halt operations, cutting supplies to rebalance the market.

In iron ore, the marginal price level has risen substantially in recent years, especially following widespread disruptions to production in Brazil.

The “first line of cost defense” for iron ore lies at about $90 to $95 a ton, at which some non-mainstream producers would be loss-making, Citigroup Inc. analysts wrote in a note last month. The majors might pursue curtailments below $75 to $80, they said.

The main culprit in iron ore’s slide towards two digits has been weak demand prospects, which grew dimmer after China’s biggest annual political gathering of the year delivered only incremental pro-growth measures.

China’s real-estate woes continue to weigh on appetite for iron ore, with investors tracking the latest debt stress at major developers including China Vanke Co. and Country Garden Holdings Co.

“Falling home sales and funding issues look structural, signalling little room for any improvement in this construction season,” Australia & New Zealand Banking Group wrote in a note.