Iron ore prices tumbled in China as steel manufacturing activities declined for May 2019. The Chinese benchmark of 62% graded iron ore index dropped by 1.47% to settle at RMB 737.00 (as on 30th May 2019).
(I1909) (DCIOU9)- September series (Source: Thomson Reuters)
The prices traded in a negative zone during the day’s session yesterday and dropped by RMB 19.5 after registering an opening of RMB 749.5, up from its previous close of RMB 741.
The prices further declined today on DCE and started the day’s session down by RMB 2.00 from its previous close, at RMB 735.00 and marked a fourth consecutive decline.
During May 2019, the manufacturing activities in China took a hit and slipped below the average level. As per the official data, the Manufacturing PMI in China declined and stood at 49.4 against 50.1 in April 2019.
The manufacturing index, which tracks a level of manufacturing activities in China slipped below 50.0, which in turn, denoted a manufacturing contraction, and exerted pressure on steel prices.
The Steel prices on Shanghai Future Exchange of the most actively traded (October) rebar future declined yesterday to mark a close of RMB 3777 (as on 30th May 2019); the prices further declined today on the exchange by RMB 2 and started the session at RMB 3775.
The steel prices of steel rebar future are currently hovering around RMB 3766 (as on 31st May 2019 AEST 12:40 PM).
The decline in steel prices during the day’s session yesterday and after economic figures disclosure today prompted physical traders to reduce the prices on physical quotes, which in a cascade, led to a decline in prices on the exchange.
Apart from a decline in manufacturing activities, a slower than previous month growth in steel downstream operations in China marked a reduced demand of steel in the Chinese domestic market, which in turn, further contributed towards the fall in iron ore prices.
In a nutshell, the iron ore prices declined for four consecutive trading sessions so far (as on 31st May AEST 12:54 PM), amid a fall in steel prices due to lowered manufacturing indication in May 2019, and slower growth in steel downstream industry in May as compared to the previous month.
However, the Hebei provinces in China recently announced that it would reduce the crude steel capacity below 200 million metric tonnes by 2020, which in turn, would mark a decline of 14 million metric tonnes of crude steel output in the year 2019 and 2020. The action planned by the high steelmaking province of China is to reduce the overcapacity of crude steel output in order to improve the air quality.
In 2015, China increased its utilization capacity from 70% to 80% during the time of overproduction curb, and if the utilization capacity inches up this time, the production curb will get indemnified, and the investors may monitor the effect on iron ore prices.
On a contrarian part, if China does not inch up its utilization capacity as it did historically, a production curb, with a condition of supply scenario being constant, could zoom up the iron ore prices.
On the supply front, the iron ore inventories across the significant 35 Chinese ports are still less, and if any signal of high demand emerges in the domestic market of China, it could provide an impetus to the iron ore prices.
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