June 30, 2017 8:56 pm JST

Iron ore price slumps as China worries about a bubble economy

World's largest importer of commodity sitting on record stockpiles

YAYA OZAKI, NQN staff writer, and KENTARO IWAMOTO, Nikkei staff writer

Iron ore production in Australia

TOKYO -- Iron ore prices, which began a steep fall in March, hit a 12-month low of $53 per ton in mid-June, largely due to Chinese authorities' attempts to tame a possible bubble economy. Since China is the main driver in the iron ore market, prices are likely to remain near that level for the time being.

China was the top importer of iron ore in 2015, accounting for 65% of the global total, according to data from the World Steel Association.

Earlier this year, demand seemed to keep rising. As infrastructure and real estate investments galloped on, the price for Australian iron ore exported to China -- a global benchmark -- increased to $94.5 per ton on Feb. 21.

In April, China's steel production marked a record high for a second straight month. At this point, Chinese steelmakers, believing demand will continue to rise, were still increasing their iron ore imports from Australia and North Korea.

But around the same time, Beijing began to more strictly monitor the so-called "shadow banking" sector, which has been helping companies and individuals finance real estate deals.

Statistics show the extra monitoring has reduced demand for building materials. In May, China's year-on-year M2 money supply growth marked a record low of 9.6%. Moreover, according to the National Bureau of Statistics, real estate investment in the first five months of the year grew 8.8% from a year earlier -- a 0.5 point decline from the first four months of the year. Also in May, China's steel production slipped.

As a result, iron ore prices hit their 12-month low in mid-June. In late June, inventories at China's 45 major ports stood at a record high of over 140 million tons.

It now appears as though the price of iron ore has bottomed out. It recovered to $60 per ton on Wednesday. However, "it is doubtful that the price will continue to rise," said Eli Owaki, an economist at Nomura Securities.

Owaki pointed out that China's efforts to tamp down construction will likely expand to rural areas. She cited Prime Minister Li Keqiang's speech at the World Economic Forum in Dalian on Tuesday, where Li warned against harboring excessive expectations for the Chinese economy. He did so by referring to financial risks posed by real estate investments and other factors.

"I think," Owaki said, "the government could start suppressing construction in rural areas."

She added that low iron ore prices will deal a particularly severe blow to Australia, the world's largest producer of iron ore and China's main supplier. The repercussions could even pull down the value of the Australian dollar, she said.

The marine shipping industry will also take a hit from low iron ore prices. The charter fee for a capesize ship -- the largest of all dry cargo ships, too big to fit through the Panama or Suez canals -- is currently set at less than $10,000. Due to pressure from resource majors, the Baltic Dry Index, a benchmark for bulk carriers, marked a four-month low in June.

"The shipping market usually improves in summer because steel production grows," a representative at Tramp Data Service said. "But this year, I don't see a chance for the price to rise."

China will likely continue to guard against an economic bubble. As it does, expect the commodities market to remain ill at ease.

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