Biggest daily drop ever throws iron ore market into panic mode

Increasing fears about the Chinese share market crash led to a sharp drop on Wall Street Wednesday, with iron ore prices plunging to their lowest level for a decade.

"While base metals picked up noticeably during the course of trading yesterday, iron ore fell sharply again. The price dropped by a further 10% to US$44.6/t, which puts it at its lowest level since the data series began over six years ago," Commerzbank said in a research note on Thursday.

"At the same time, this also marked its biggest daily decline ever. Iron ore has shed nearly 29% in the past two weeks - a particularly clear expression of the concerns about China. However, there are also specific reasons which have contributed to the price slide. For example, stocks in Chinese ports increased again last week for the first time in 12 weeks," the note read.

Chief among the current concerns is the health of China's markets and its broader economy, given its position as the world's largest consumer of iron ore.

Port stockpiles in China have also increased over the past week for the first time since April, raising concerns about growing oversupply through the remainder of the year as Chinese steel demand slumps.

IMPACTS ON MINERS

The stunning overnight slump in iron ore prices has put much of the sector's production into the red, with second-tier producers under renewed pressure.

Majors Vale, BHP Billiton and Rio Tinto break even at an iron ore price of about US$31-32/t, so they still have solid margins at current prices.

The fourth largest iron ore producer, Australia's Fortescue, said its breakeven point is US$39/t, so it is still making profit, but some analysts dispute that figure, with UBS putting it at US$44/t.

Australia-based Morgans Holdings senior dealer Luke McElwaine said that miners' share prices did not drop as dramatically as some might have expected early on Thursday because a sub-US$45/t iron ore price had been largely priced in.

"You have to give the market some credit that it foresees a few of these things," McElwaine said.

In fact, Capital Economics senior commodities economist Caroline Bain has been warning since June about iron ore supply picking up strongly and leading to a renewed downturn in international prices.

"Even though we have factored in a 15% year-on-year drop in Chinese iron ore production this year, the market can still be expected to record a huge surplus. As such, we retain our forecast that iron ore prices will fall back again to US$45/t at end-year, from US$65/t currently," Bain said in a June 16 report.

However, iron ore producers in Brazil, such as CSN and Anglo American, and Australian peers as BC Iron, Mt Gibson Iron and Atlas Iron, will all be operating in the red should prices stay at US$45/t. The news also frustrates Atlas Iron's push to get back into the game.

IG Markets strategist Evan Lucas made a stark summary of the panorama for the iron ore industry by tweeting on Thursday that the price of steel - of which iron ore is a key ingredient - in China was so weak it was "now cheaper per tonne than cabbage."